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RSTV: IN DEPTH- THE COMPANIES (AMENDMENT) BILL, 2020

RSTV

Introduction:

A bill to amend the Companies Act 2013 and decriminalise various offences under it was introduced in Lok Sabha. Minister of State for Finance Anurag Thakur introduced the Bill in the lower house, making it clear that the government was not looking to decriminalise non-compoundable offences. The Bill was introduced amid opposition by members of various parties who vehemently opposed the bill, demanding that it be referred to the Parliamentary Standing Committee on Finance. The government says the amendments in the existing Companies Act will help reduce the burden on the National Company Law Tribunal

The Bill seeks to amend the Companies Act, 2013.

  • Producer companies: Under the 2013 Act, certain provisions from the Companies Act, 1956 continue to apply to producer companies. These include provisions on their membership, conduct of meetings, and maintenance of accounts. Producer companies include companies which are engaged in the production, marketing and sale of agricultural produce, and sale of produce from cottage industries. The Bill removes these provisions and adds a new chapter in the Act with similar provisions on producer companies.
  • Changes to offences: The Bill makes three changes. First, it removes the penalty for certain offences. For example, it removes the penalties which apply for any change in the rights of a class of shareholders made in violation of the Act. Note that where a specific penalty is not mentioned, the Act prescribes a penalty of up to Rs 10,000 which may extend to Rs 1,000 per day for a continuing default. Second, it removes imprisonment in certain offences. For example, it removes the imprisonment of three years applicable to a company for buying back its shares without complying with the Act. Third, it reduces the amount of fine payable in certain offences. For example, it reduces the maximum fine for failure to file annual return with the Registrar of Companies from five lakh rupees to two lakh rupees.
  • Under the Act, one person companies (i.e., companies with only one member) or small companies (i.e., with lower paid-up share capital and turnover thresholds) are only liable to pay up to 50% of the penalty for certain offences (such as failing to file annual return). The Bill: (i) extends this provision to all producer companies and start-up companies, (ii) extends this provision to apply to violation of any provision of the Act, and (iii) limits the maximum penalty to two lakh rupees for the company and one lakh rupees for a defaulting officer.
  • Direct listing in foreign jurisdictions: The Bill empowers the central government to allow certain classes of public companies to list classes of securities (as may be prescribed) in foreign jurisdictions.
  • Exclusion from listed companies: The Bill empowers the central government, in consultation with the Securities and Exchange Board of India, to exclude companies issuing specified classes of securities from the definition of a “listed company”.
  • Remuneration to non-executive directors: The Act makes special provisions for payment of remuneration to executive directors of a company (including managing director and other whole-time directors) if the company has inadequate or no profits in a year. For example, if a company has an effective capital of up to five crore rupees, the annual remuneration to its executive directors cannot exceed 60 lakh rupees. The Bill extends this provision to non-executive directors, including independent directors.
  • Beneficial shareholding: Under the Act, if a person holds beneficial interest of at least 10% shares in a company or exercises significant influence or control over the company, he is required to make a declaration of his interest to the company. The company is required to note the declaration in a separate register. The Bill empowers the central government to exempt any class of persons from complying with these requirements if considered necessary in public interest.
  • Exemptions from filing resolutions: The Act requires companies to file certain resolutions with the Registrar of Companies. These include resolutions of the Board of Directors of the company to borrow money, or grant loans. However, banking companies are exempt from filing resolutions passed to grant loans, or to provide guarantees or security for a loan. This exemption has been extended to registered non-banking financial companies and housing finance companies.
  • Corporate Social Responsibility (CSR): Under the Act, companies with net worth, turnover or profits above a specified amount are required to constitute CSR Committees and spend 2% of their average net profits in the last three financial years, towards its CSR policy. The Bill exempts companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR Committees. Further, companies which spend any amount in excess of their CSR obligation in a financial year can set off the excess amount towards their CSR obligations in subsequent financial years.
  • Periodic financial results for unlisted companies: The Bill empowers the central government to require classes of unlisted companies (as may be prescribed) to prepare and file periodical financial results, and to complete the audit or review of such results.
  • Benches of NCLAT: The Bill seeks to establish benches of the National Company Law Appellate Tribunal. These shall ordinarily sit in New Delhi or such other place as may be notified

Companies (Amendment), 2019:

  • Allows companies to transfer their unspent CSR funds to a separate account and the same has to be spent within three financial years. In case, the money remains unspent, then it should be transferred to any fund specified in Schedule VII of the Act.
  • Provides more teeth to the central government to deal with violators and reducing burden on special courts.
  • Seeks to enable the National Financial Reporting Authority (NFRA) to perform its functions through divisions and executive body.
  • Seeks to empower Registrar of Companies (RoC) to initiate action for removal of a company’s name if the latter is not carrying out business activities as per the Act.
  • Proposes to transfer some functions from NCLT to the Central government such as dealing with applications for change of financial year and conversion from public to private companies.
  • In order to curb the menace of shell companies, the Bill proposes making non-maintenance of registered office and non-reporting of commencement of business grounds for striking off the name of the company from the register of companies.

Corporate Social Responsibility (CSR):

  • It is the integration of socially beneficial programs and practices into a corporation’s business model and culture.
  • India is one of the first countries in the world to make CSR mandatory for companies following an amendment to the Companies Act, 2013 (Companies Act) in 2014.
  • Under the Companies Act, businesses can invest their profits in areas such as promoting rural development in terms of healthcare, sanitation, education including skill development, environmental sustainability, etc.
  • Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:
    • net worth is Rs 500 Crore or more; or.
    • turnover is Rs 1000 Crore or more; or.
    • net profit amounts to Rs 5 Crore or more.
  • As per the Companies (Amendment) Act, 2019, CSR is applicable to companies before completion of 3 financial years.
  • Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.
  • For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.
  • Social responsibility has a strategic importance for two reasons:
    • A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society
    • If the company wants to succeed in the long term it needs to have the acceptance—or licence to operate—from social actors affected by the company’s’ operations.