Amendments and Recent Developments in Companies Act

CSR Rules wef 2021


Companies Amendment Act 2020

DECRIMINALISATION OF COMPANIES ACT
  • With the overhaul of Companies Act in 2014, a lot more regulations were introduced for better compliance and therefore a number of penal provisions with both civil  and criminal penalties were introduced.
  • As compliance levels improved and the government felt a need to boost ease of doing business the government started  to relax criminal provisions.The move has been part of larger government efforts to boost ease of doing business since 2018.

WHAT ARE THE CHANGES?

  • The number of compoundable offences under the Companies Act have come down to 31 from 81 prior to the 2018  amendment to the Companies Act.
  • For e.g.
  • Rrecently government decriminalised offences such as delays in filing CSR reports, or failure to rectify the register of  members in compliance with orders from the NCLT.
  • The number of compoundable offences under the Companies Act have come down to 31 from 81 prior to the 2018  amendment to the Companies Act.
  • A number of these offences have been moved from needing to be prosecuted through the National Company Law Tribunals  to being dealt with by the Registrar of Companies.
  • The RoC is empowered to decide penalties for these offences and companies can appeal to the Regional Director (RD) of  the Ministry of Corporate Affairs (MCA) to appeal or seek  modifications to these decisions.
  • This move would help free up the bandwidth of NCLTs to deal with cases dealing with insolvency and other higher priority matters.
  • The total number offences to be dealt with the in- house adjudication mechanism has risen from 18 in  2018 to 58 proposed in the latest amendment.

 

Companies Amendment Act 2019
Issue of Dematerialized Shares
Under the 2013 Act, certain classes of public companies can issue shares only in demat form. The Bill states this may be prescribed for other classes of unlisted companies as well
Recategorisation of Offences
Under the 2013 Act, there are 81 compoundable offences that carry punishments of a fine and/or prison terms. These offences are heard by courts. The Bill makes 16 of these offences civil defaults, where government-appointed adjudicating officers may levy penalties. Some of these offences are the issuance of shares at a discount, and the failure to file annual returns. The Bill also amends penalties for some other offences.
Corporate Social Responsibility
As of now, companies that are required to budget for CSR must disclose in their annual reports the reasons why they were unable to fully spend these funds. Now, any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Act (for example, the Prime Minister's Relief Fund) within six months of the financial year.
Debarrment of Auditor- corrected
Under the Act, the National Financial Reporting Authority can debar a member or firm from practising as a Chartered Accountant for six months to 10 years in case of proven misconduct. The Bill amends this punishment to provide for debarment from appointment as an auditor or internal auditor of a company, or performing a company's valuation, for the same period
Registration of Charges
Under the Act, companies must register charges (mortgages, etc.) on their property within 30 days of creation of the charge, extendable up to 300 days with permission from the Registrar of Companies. The Bill changes the deadline to 60 days (extendable by 60 days)
Change in Approving Authority
Under the Act, change in period of financial year for a company associated with a foreign company, has to be approved by the National Company Law Tribunal (NCLT). Any alteration in the incorporation document of a public company which has the effect of converting it to a private company, too, has to be approved by the NCLT. Under the Bill, these powers have been transferred to the central government
Mismanagement -Bar on Holding Office

Under the existing Act, the central government or certain shareholders can apply to the NCLT for relief against mismanagement of the affairs of the company. The Bill states that in such a complaint, the government may also make a case against an officer of the company on the ground that he is not fit to hold office in the company, for reasons such as fraud or negligence. If the NCLT passes an order against the officer, he will not be eligible to hold office in any company for five years.

Highlights of *Companies (Amendment) Ordinance 2019*
1. *Commencement Certificate* is mandatory now to be obtain within 6 months of Incorporation without which, it can not comment its business activity or borrow money.
2. The ROC can strike off a company if the address of Regd Office is *bogus* or incomplete/improper  address.
3. Conversion of public Ltd to Pvt Ltd matters shifted from NCLT to Regional Directorate.
4. Company cannot issue shares at discount, - heavy penalty imposed on violation.
5. Alteration of Authorised Capital to be intimated within 30 days, default - penalty 1000 every day or 5 Lac whichever is less.
6. Creation of charge filing with ROC-  time limit *reduced* from 300 days to 60 days.
7. Wrong statement/ information in filing Charge forms with ROC may lead to misrepresentation and *jail*
8. *Annual Return* should be filed within 60 days from AGM, failure to this, penalty of 100 per day to Company + directors max 5 Lakh apart from ROC delay charges is applicable.
9. Penalty of 5 lakh to Company secretary certifying wrong Annual Return.
10. Explanatory statement to be given with Notice of General Meeting must contain all details as required by Law, if no detail/short detail/misleading - penalty for Company + Directors + KMP - 50K
11. *filing of Resolutions* with ROC- delay will be *very costly* now. Penalty for defaulter increased substantially. 500 every day max 25 Lakh
12.Filing of Balance sheet with ROC within time limit- failure is costly for Company + Directors both. Penalty of 100 per day + 1 lakh to Company + Director each.
13. *Resignation of Auditor* must be filed by the resigning Auditor within 30 days, failure to which the resigning Auditor is liable for penalty of 50,000 + 500 per day.
14. A director can not become director in  morethan 20 companies. If he continues, he becomes disqualified now.
15. Appointment of CS on payroll (Pvt Co having paid-up capital 5 cr & above) is mandatory. Default is now very costly- penalty increased substantially.
16. ROC may strike off a company if subscribers have not paid initial share capital after incorporation of a Company within 6 months-FAR.
17. The Indian subsidiary or associate or holding company of the foreign company may be allowed to follow any period as its financial period on an application made by such company if it is required for consolidation of its financials with the foreign company. Also the such period may or may not be one year.

Managerial Remuneration under Companies Act 2013

 

Registered office of a company


In December 2012, the ministry of corporate affairs (MCA) issued an advertisement announcing tightening of rules regarding address proofs of registered offices. The advertisements asked corporates and professionals to provide details of registered offices, whether it is owned or leased and proof of registered office address has been made mandatory. The ministry gave 180 days to rectify mistakes and cautioned corporates and professionals to be more vigilant and careful in certification and verification while providing the details in the forms to avoid penal action.

Therefore, Form 18 requires a certification from a professional. Goldmine’s Form 18 was signed by a chartered accountant by name Sudhanshu Bansal, who has the membership number 500616. “I further certify that I have personally visited the new address, verified it and I am of the opinion that the premises are indeed at the disposal of the applicant company,” his certification for goldmine’s new address says. 

Now, it is open for this professional to argue that on the date of certification there was an office. If it was wrapped up subsequently or wiped off the face of the earth, how can she be held responsible? Fair point. Does that absolve the Ministry of its responsibility to keep its turf clean and prevent it from becoming a money laundering paradise? 

Vide rules notified in 2014, MCA has brought in a new form INC 22, the requirements of this form are even more elaborate. It won’t take utility bills older than two months for address proof, it requires an authorization from the owner of premises to use it as the registered office. 

1) the registered document of the title of the premises of the registered office in the name of the company; or

2) the notarized copy of lease or rent agreement in the name of the company along with a copy of rent paid receipt not older than one month;

3) the authorization from the owner or authorized occupant of the premises along with proof of ownership or occupancy authorization, to use the premises by the company as its registered office; and

4) the proof of evidence of any utility service like telephone, gas, electricity, etc. depicting the address of the premises in the name of the owner or document, as the case may be, which is not older than two months.

You can ask for endless lists of documents, but if there are no cross verifications or  punishment for lapses, how will things get better?

Class action companies act
class action enables one or more plaintiffs to file a suit on behalf of a larger group or class, wherein such class has common rights and grievances. Class action is a well-defined area of litigation in the US and can be broadly categorized into securities class action and consumer class action.

The Indian legislature considered instances of corporate fraud in India, primarily the "Satyam scam" while introducing the concept of class action. In this case, no proceedings could be initiated in India due to the absence of any statutory provision for class action. The Companies Act, 2013, addresses this with a provision on class action.

Inclusion of this concept under the statute was also considered and recommended by different committee reports such as the JJ Irani Committee Report, 2005, the 21st report of the Standing Committee on Finance on the Companies Bill, 2009, and the 57th report of the Standing Committee on Finance on the Companies Bill, 2011.

The 2013 act has now introduced the concept of class action under section 245, which has been notified with effect from 1 June.

Section 245 introduces a distinct regime of class actions. A class action can be instituted by specified numbers of members, depositors or any class of them before the National Company Law Tribunal (NCLT, which has been constituted with effect from 1 June), if they are of the opinion that the management or conduct of the company is being conducted in a manner prejudicial to the interest of the company, its members or depositors.

It can be instituted against the company, its directors, its auditor (including the audit firm), any expert, adviser, consultant, or any other person for specified acts or omissions.

Reliefs which can be granted in a class action suit include: restraining the company from committing an act that is beyond the authority of the articles of association (AoA) or memorandum of association (MoA) of the company, from committing any act contrary to the provisions of the 2013 act or any other applicable law, and declaring a resolution altering the MoA or AoA of the company as void if the resolution was passed by not disclosing material facts, or by misstatement to the members or depositors. These reliefs are akin to preventive reliefs and are based on the principles under the Specific Relief Act, 1963.

Section 245 also allows seeking damages or compensation or any other suitable action against the company or its directors, for any fraudulent, unlawful or wrongful act or omission or conduct or any likely act or omission or conduct on their part; its auditor (including audit firms), for any improper or misleading statements of particulars made in the audit report or for any fraudulent, unlawful or wrongful act or conduct; any expert, adviser, consultant or any other person for any incorrect or misleading statements made to the company or for any fraudulent, unlawful or wrongful act or conduct, or any likely act or conduct on their part.

While section 245 prescribes a limit for the fine that may be imposed for non-compliance with NCLT orders, it does not prescribe a limit for the amount of damages or compensation claimable. This exposes the company and other relevant entities and persons to unlimited liability, as if a tortious claim was to be adjudicated in a class action.

Introduction of the provision on class action suits under the 2013 act is likely to have far reaching implications. However, the possibility of misuse of this remedy by filing false and frivolous complaints cannot be ruled out. Therefore, it is important for the relevant authorities to balance the interest of all the parties while deciding a class action suit.

Another important issue is the likely creation of two parallel offences of fraud both emanating from the same cause of action; one under section 245(1)(g) and other under section 447 of the 2013 act. While section 245(1)(g) provides for unlimited damages or compensation or other suitable action, section 447 provides for fine and imprisonment for offence relating to fraud. This may increase the exposure of the relevant entities and persons to the specified liabilities

BEN-1234 for SBO compliance (as part of FATF commitment by India)

SBO

Section 90 of Comapnies Act 2013 has been notified with the intent of identifying SBO in a company. The concept of identifying UBO/ SBO is not a new concept. The requirement has already been prescribed by following:

·         SEBI under Guidelines on Identification of Beneficial Ownership;

·         RBI under Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016;

  • Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005   


 What are the major differences between the scope and applicability of sec 89 and sec 90?

Sec 89 and 90 operate in different, though related, fields. The intent of sec 89 is to identify cases where nominal ownership of shares, as per the register of members, is not backed by beneficial ownership.Sec 89 captures the dichotomy where the legal owner is not the beneficial owner. Whereas section 90 is to recognize natural person responsible for driving the vehicle.

Example :   If the pledgee gets the voting rights and can vote at discretion, the pledgee becomes entitled to beneficial interest. Hence, the pledgee may arguably become beneficial owner lacking legal title for the purpose of sec. 89. However, for the purpose of sec. 90, the pledge and retention of voting rights is only a security interest. It is not ownership interest. Hence, it does not seem to be keeping in line with the spirit of sec. 90 to regard a pledgee as a significant beneficial owner.

SBO Threshold

Threshold limit for the determination of the SBO through the revised SBO Rules, Para 2 (1) (h) of the Rules says:

 “Significant Beneficial Owner in relation to a reporting company means an individual referred to in sub-section (1) of section 90, who acting alone or, together, or through one or more persons or trust, who possesses one or more of the following rights or entitlements in such company, namely:-

·      Holds indirectly, or together with any direct holdings, not less than ten percent of the shares;

·      Holds indirectly, or together with any direct holdings, not less than ten percent of the voting rights in the shares;

·      Has right to receive or participate in not less than ten percent of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;

·      Has right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone.”

 

Compliance to be ensured by SBOs & Company

1.        What is the timeline for declaration by SBOs?

 Initial Disclosure:

Every individual who is a SBO in a reporting company, is required to file a declaration in Form No. BEN-1 to the reporting company within 90 days from February 8, 2019.

Continual Disclosure:

Every individual, who subsequently becomes a SBO/ or where his significant beneficial ownership undergoes any change shall file a declaration in Form No. BEN-1 to the reporting company, within 30 days of acquiring such significant beneficial ownership or any change therein.

 2.        Is there any requirement of intimating the Registrar of Companies regarding the identification of SBOs?

 The declaration of beneficial interest received by the company, is required to be filed in Form No. BEN-2 with the Registrar in respect of such declaration, within a period of thirty days from the date of receipt of declaration by it, by the company.

 3.        Will the company have to keep any record of the SBOs?

 Every company is required to maintain a register of SBOs in Form No. BEN-3.

 Also, this register shall be open to for inspection during business hours, at such reasonable time of not less than two hours, on every working day as the board may decide, by any member of the company on payment of such fee as may be specified by the company but not exceeding fifty rupees for each inspection.

 4.        How will the company seek information from various persons about SBOs?

 Company is required to give notice seeking information in accordance with Section 90 (5) of the Act, in Form No. BEN-4.

    




BEN-1

Declaration by the significant Beneficial owner within 90 days from the date of the Companies (Significant Beneficial Owners) Amendment Rules, 2019, i.e from 1st july

BEN-2

Return by the reporting company within 30 days of receipt of declaration.

BEN -3

The reporting company is required to maintain register of all significant beneficial owners.

BEN-4

Notice to be given by the reporting company to all the members other than individual seeking information related to the shares held.