7 April 2020

COVID-19 | CLARIFICATIONS AND RELIEFS MEASURES BY MCA

The spread of Covid-19 in India has led the Indian Government to declare a lockdown. The lockdown in India has resulted in a standstill for many businesses, using the work from home option if available or temporarily stopping work.

The Companies Act, 2013 (Act), has laid down stringent procedures and compliances for a company to follow in a time bound manner, failing which the company will be liable inter-alia to pay penalties and face prosecution. In order to ease the hardship faced by companies due to Covid-19, the Ministry of Corporate Affairs (MCA) has issued clarifications and granted reliefs, which are as follows:

CLARIFICATION REGARDING USE OF CSR FUNDS

MCA has issued a clarification stating that spending of CSR funds for activities related to combat Covid-19, will be an eligible CSR activity. The Act obligates the board of a company to ensure that the company spends at least 2% of the average net profit in every financial year as per the CSR policy of the company, for the immediately preceding 3 financial years. The clarification enumerates that the CSR funds may be spent for various activities to battle Covid-19 which are enlisted under item (i) (promotion of health care, including preventive health care) and item (xii) (disaster management, including relief, rehabilitation and reconstruction activities) of Schedule-VII of the Act. MCA has further clarified that the items in Schedule-VII of the Act are broad-based and may be interpreted liberally for the purpose.

RELIEF MEASURES- REDUCTION IN COMPLIANCE BURDEN

In view of the prevalent situation, the MCA has granted relief measures for companies under the Act to cushion the impact of the ongoing pandemic on the economy and to reduce the compliance burden. The said relief measures are discussed below:

• Filing of Documents: Additional fees shall not be charged for late form filing in respect of any document, return or statement, which is required to be filed with the MCA-21 registry, irrespective of its relevant due date, during a moratorium period starting from 1 April 2020 to 30 September 2020;

• Time period for holding Board Meetings: As per Section 173(1) of the Act, every company shall hold the first meeting of its board of directors within 30 days of the date of its incorporation and thereafter hold a minimum of 4 meetings of its board every year, such that not more than 120 days shall elapse between 2 consecutive board meetings. The said mandatory time intervals have been extended by a period of 60 days till 30 September 2020;

• Requirement of Resident Director: As per Section 149(3) of the Act, every company is required to appoint one director who stays in India for a period of at least 182 days in a financial year. The said requirement has been relaxed and a non-compliance of the period of minimum residency by at least one director in India, as mandated shall not be treated as a violation of the provisions of the Act for financial year 2019-20;

• Meeting of Independent Directors: Schedule IV of the Act requires that in every financial year, the independent directors shall hold at least one meeting without the presence of the non-independent directors and the management. The MCA has relaxed the compliance with the above provision, for the financial year 2019-2020 stating that if the independent directors were unable to hold even one such meeting, the same shall not be viewed as a violation of the provisions of the Act;

• Timeline for maintaining deposit repayment reserve: As per Section 73 of the Act, every company inviting, accepting or renewing deposits, must maintain at least 20% of the amount of the deposits maturing during the following financial year in the form of a deposit repayment reserve account in a separate bank account of a scheduled bank. This reserve is required to be created on or before the 30thday of April each year. The MCA relaxed the said compliance with the above provision, for the deposits maturing during the financial year 2020-2021 and the companies may now create such a deposit repayment reserve till 30 June 2020;

• Declaration for commencement of business: As per Section 10A of the Act, a newly incorporated company is required to file a declaration of commencement of business within 6 months of its incorporation. MCA has relaxed the compliance with the above provision by providing a time window of additional 6 months to file such declaration of commencement of business beyond the existing time limit.

MHCO COMMENT:

The above clarification issued by MCA regarding utilization of CSR funds will encourage the companies to utilize their reserves made for CSR to be utilized for combating Covid-19 outbreak in the country. The relief measures and relaxations granted by MCA will certainly reduce the burden of stringent compliance faced by the companies in the current situation.

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.