Blog Details

Author - Pallavi Parmar

Introduction

“The Companies (Amendment) Bill, 2019, was introduced to ensure more accountability and better enforcement which in turn strengthen the corporate governance standards and compliance management in the corporate area,” stated the Honourable Finance and Corporate Affair Minister, Nirmala Sitharaman. This is how describing it, in short, would seem best.

The main provision of the bill was to lessen the NCLT burden by reducing the cases as well as introducing amendments related to Corporate Compliance & Corporate Governance. It also attempts to strengthen the in-house adjudication mechanism.

In Brief

The provisions included in the bill are as follows:

1. Commencement of business -  A company may not start the business until
   1. files a declaration within 180 days of establishment and confirms that every subscriber to the memorandum has paid for the shares declared to be taken.
   2. files a verification of the registered address with the Registrar of Companies (RoC) within 30 days. The name of the company may be removed from the Register of Companies if it fails to do so.
2. Shifting of powers from the National Company Law Tribunal (NCLT) to the Central Government - The application which was filled with NCLT is now required to be filled with Central Government if a company
   1. requires adopting a different financial year for consolidation of its account outside India.
   2. requires conversion from a public company to a private company.
3. Matters to be stated in the prospectus - Earlier there was the requirement of registration of prospectus with the Registrar of Companies. According to the amendment the prospectus will be filed with the registrar.
4. Issuance of dematerialised shares - Certain classes of public companies required to issue shares in dematerialized form. This may be suggested for other classes of the unlisted companies as well.
5. Re-categorisation of certain offences - In 2013 act, there were 81 compoundable offences which were punishable with penalty or imprisonment or both. In this bill, 16 offences have been re-categorized as civil which is managed by adjudicating officers.
6. Registration of charges - The earlier amendment which states that companies require to register charges on their property within 30 days of the creation of charge remains unchanged. In addition to this, the new amendment states that the time limit can be extended up to 300 days with the permission of RoC if the charges created before the initiation of the amendment. In case of the charges created on or after the initiation of the amendment the registration requires to be made within 60 days of its creation.
7. Significant Beneficial Owners in a Company - Every company requires to identify an individual of a company who is a Significant Beneficial Owner and requires their compliance.
8. Corporate Social Responsibility ("CSR") - Companies are now bound to transfer CSR amount to CSR account.
9. Prevention of oppression and mismanagement - If a person found unfit by the NCLT then he will be unqualified to hold office as a director for a period of 5 years.
10. Compounding of offences - The power of settling down compound offences is transferred to the Central Government as well as increased the penalty limit up to 25 Lacs.

Impact on Compliance

Further analysis of the important provisions mentioned in the bill which is having a significant impact on corporate compliance:

1. Significant Beneficial Owners (SBO) - As per the amendment bill, SBO is an individual who has one or more of the following right/entitlement
   1. Holds indirectly/together with any direct holdings with a minimum of 10% of the shares
   2. Holds indirectly/together with any direct holdings with a minimum of 10% of the voting rights in the shares
   3. With the right to receive/participate in a minimum of 10% of the total distributable dividend or any other distribution through indirect holdings/along with any direct holdings.
   4. With the right of utilising significant influence/control through direct-holdings and other means.
2. Corporate Social Responsibility (CSR) - According to the amendment, companies are now obliged to transfer their CSR amount to CSR account opened in a scheduled bank. This CSR amount should be utilised within a period of 3 years. Later it will be transferred automatically to the Fund specified in Schedule VII if not spent. If the company fails to spend or transfer the CSR amount, then the punishments would be:
   1. The fine of a minimum of Rs. 50,000/- and may extend up to Rs. 25,00,000/-
   2. Officers of the company may get imprisonment up to 3 years or with a fine of Rs. 50,000/- and may extend up to Rs. 5,00,000/- or both.
3. Unfit persons not to manage companies - According to the act, the Central Government can apply to the NCLT to prevent oppression and mismanagement of the company. The government may initiate a case against a responsible person and refer to the NCLT for inquiries. NCLT records a decision stating whether a person is fit to hold the office of a director. If found unfit by NCLT he will disqualify to hold office as a director for the next 5 years.
4. Compulsory De-mat for certain unlisted companies - The provision has been introduced regarding the class/classes of unlisted companies will be needed to hold and transfer securities only in dematerialised form. Thus, it becomes easier to track and monitor issues related to shares. Also, the provision of issue, held and transfer of the private company’s shares in Demat form has been introduced to increase the transparency.