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Dissecting the Companies (Amendment) Bill 2019

August 10, 2019

[The following update is brought to you by Shreetama Ghosh, who is an Editor at IRCCL.]

 

The Companies (Amendment) Bill 2019 (Bill) has been tabled before and passed by the Lok Sabha and the Rajya Sabha with the aim to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in the corporate sector. It is time to look at some of the important amendments and examine whether they have been brought about in consonance with such ambition.

 

Commencement of Business: The Bill has dealt with the issue of shell companies by introducing Section 10A to the Companies Act 2013 (Act), wherein a company cannot commence business unless it files: (i) a declaration within 180 days of incorporation, confirming that every subscriber to the memorandum of the company has paid for the shares agreed to be taken by him, and (ii) a verification of its registered address with the RoC within 30 days of incorporation.  If it fails to comply with these provisions, a fine can be imposed on the company and the officers in default, and if it is further found not to be carrying out business, its name may be removed from the register of companies.

 

Corporate Social Responsibility (CSR): Section 135 of the Act is proposed to be amended to provide that if companies do not fully spend their CSR funds, they must disclose the reasons for the same in their annual report, and any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Act (for example, the PM Relief Fund) within six months of that financial year. However, if such funds are committed to any ongoing projects, the unspent funds will have to be transferred to an Unspent CSR Account within 30 days of the end of the financial year, and spent within three years. Any funds remaining unspent after three years will have to be transferred to one of the funds under Schedule 7.  Any violation of these provisions may attract a fine for the company and every defaulting officer may be punished with imprisonment or fine or both.

 

Change in Approving Authority: Under the Act, any change in the period of financial year for a company associated with a foreign company had to be approved by the National Company Law Tribunal (NCLT), previously.  Similarly, any alteration in the incorporation document of a public company having the effect of converting it to a private company had to be approved by the tribunal.  The Bill has proposed to transfer these powers to the Central Government.

 

Re-categorisation of Offences: The Act contains 81 compoundable offences, which are taken care of by the courts. The Bill has proposed to re-categorise 16 of these offences as civil defaults, wherein the adjudicating officers (appointed by the central government) may now levy penalties instead.

 

Debarring Erring Auditors: Under Section 132(4) of the Act, the National Financial Reporting Authority could debar a member or firm from practising as a Chartered Accountant for a period of 6 months to 10 years, for proven misconduct.  The Bill substitutes the punishment to debarment from appointment as an auditor or internal auditor of a company or performing a company’s valuation for the same period.

 

Bar on Holding Office: Under Section 241 of the Act, the Central Government or certain shareholders can apply to the NCLT for relief against mismanagement of the affairs of the company.  The Bill proposes 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 such an officer, he will not be eligible to hold office in any company for 5 years. 

 

Expanding the Power of Compounding: Under Section 441(1) of the Act, a Regional Director could compound offences with a penalty of up to INR 5 lakhs.  The Bill proposes to increase this ceiling to INR 25 lakhs.

 

 

 

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