16 August 2019

LEGAL UPDATE | THE COMPANIES (AMENDMENT) ACT, 2019

On 31 July 2019, the Government promulgated the Companies (Amendment) Act, 2019 (Amendment) to amend the Companies Act, 2013 (Act). A significant portion of the Amendment rationalises the penalty provisions in the Act by reducing the quantum of penalty and substituting imprisonment of officers in default by a fine. That said, there are other significant amendments which are summarised in this update.

• Declaration by new companies: A company incorporated after the commencement of the Amendment and having a share capital cannot commence business or borrow funds unless (a) a declaration is filed by a director within a period of 180 days from the date of incorporation of the company in the prescribed form with the Registrar that every subscriber to the memorandum of the company has paid the value of the shares agreed to be taken by him on the date of making such declaration; (b) the company has filed with the Registrar a verification of its registered office as set out in Section 12 (2) of the Act. If the declaration is not filed within the prescribed period and the Registrar is of the view that the company is not carrying on any business, the Registrar can initiate action for removal of the name of the company from the register of companies.
• Dematerialisation of Shares: The Central Government may prescribe that shares of a private company can only be issued or transferred in dematerialised form.
• Period for registration of charges: After the commencement of the Amendment, the period of extension for registration of charges has been reduced to 60 days with a further extension of 60 days possible on payment of additional fees.
• Corporate Social Responsibility (CSR): The most significant changes brought about by the Amendment are the changes to the provisions on CSR. These provisions now apply to companies that have been carrying on business for less than 3 financial years. If a company fails to spend the prescribed amount in discharging its CSR, the consequence is no longer giving reasons for the same. Comply or explain approach has been done away with by the Amendment.
  
  The company is now required to transfer the unspent amount to a Fund specified in Schedule VII of the Act within a period of 6 months of the expiry of the financial year. If the ongoing project for which the funds have been allocated meets certain prescribed conditions, the company is required to transfer the unspent amount within a period of 30 days from the end of the financial year to a special account opened by the company with a scheduled bank to be called the Unspent CSR Account and such amount shall be spent by the company towards its CSR Policy within a period of 3 financial years from the date of such transfer failing which the company shall transfer the unspent amount to a Fund specified in Schedule VII of the Act within a period of 30 days from the date of completion of the third financial year.
  
  The Amendment now penalises the failure of a company to comply with the provisions dealing with CSR by imposing a fine of not less than INR 50,000 but which may extend to INR 25 lakhs on the company and providing for imprisonment of every officer of the company who is in default for a term which may extend to 3 years or with a fine as prescribed for the company or with both. Finally, the Central Government is empowered to issue directions to companies on CSR which must be complied with by such companies.
• Additional Disqualification of a Director: An additional disqualification of a director has been added whereby a director is disqualified if he fails to comply with the provisions of Section 165 of the Act on the maximum number of directorships that may be held by a person.
• Additional powers to Central Government: The Central Government has been given certain additional powers under Section 241 of the Act dealing with oppression and mismanagement. Where in the opinion of the Central Government there exist circumstances suggesting that (a) any person concerned in the conduct and management of the affairs of a company is or has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust; (b) the business of the company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; (c) a company is or has been conducted and managed by such person in a manner which is likely to cause or has caused serious injury or damage to the interest of the trade, industry or business to which such company pertains; or (d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest, the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such 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.

MHCO Comment: The most significant amendments of the Amendment are the changes to the provisions on CSR and the powers given to the Central Government to initiate an inquiry into the conduct of directors and key managerial personnel of companies.

• The provisions on CSR are now mandatory with penal consequences for non-compliance. In making these changes, the Government has moved away from the “comply or explain” approach. In a liberalised capitalist society that India now is these changes are difficult to understand. It is the responsibility of the Government to address social inequity. This responsibility cannot be transferred to the private sector. If the Government is concerned on distribution of wealth, it could impose an additional tax on hugely profitable companies and use the income to address social issues. The changes introduced by the Amendment are akin to such a tax with the responsibility of achieving social change now imposed on the private sector. This is a wholly undesirable result. In the event if this Amendments are gazetted and notified, it is hoped these provisions will be challenged in the courts of law to ensure that the private sector is allowed to operate for overall economic development without being dragged into effecting social change which is the responsibility of the Government.

• The powers given to the Central Government on initiating an inquiry into whether directors or key managerial personnel are fit and proper persons to manage a company seem justified given the number of cases of mismanagement in the corporate sector headlined by the IL&FS case. The Central Government can now initiate action before a crisis snowballs to prevent any fallout of mismanagement and diversion of funds.  

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.comfor any assistance.