The Act came at a time when companies are reeling under stress due to the coronavirus pandemic. As a result of it the Amendment in the Companies Act, 2013 has been proved to be a stress reliever to many of them. This recently enacted Companies Amendment Act, 2020 has legislated corporate law reforms measures announced as part of the stimulus package of government’s ambitious Atma Nirbhar Bharat Abhiyan. These are been showcased as big reforms that will go a long way in easing business for companies in these trying times. This paper chiefly focuses on the main motive of the amendments, the background and history of the Companies Act, why there was a need to bring the amendments, some of the zeniths of amendments, the major thrust amendments and the impact of those amendments on the Indian companies, foreign companies also the Indian companies operating abroad; this article overall talks about the amendments.
Keywords: Amendment, Company Law Committee, Companies Act 2013, Reduction of the penalties, Decriminalise, CSR, Producer Companies.
The Companies Amendment Act, 2020 got the assent of Hon’ble President as on 28th September, 2020 and is thus operative since that date. It was passed by the Lok Sabha on 19th September, 2020 and by the Rajya Sabha on 22nd September, 2020. In this Act 4 sections have been newly inserted which includes the provisions for Producer Companies and amendments in 61 sections. The recommendations of the Company Law Committee1 and Internal review by the Government, the Companies (Amendment) Act, 2020 strives to decriminalise certain offences under the act in case of defaults which can be inferred objectively and which otherwise lack any element of fraud or do not involve larger public interest. Apart of decriminalization, the Chapter on Producer Companies has been assimilated in the Act itself besides alterations in the definition of listed company, CSR provisions, listing of securities abroad, periodical returns by unlisted companies, remuneration of IDs ad NEDs in the event of inadequacy of profits, etc.
The Company Legislation in India has been derived from Company Legislation in England e.g. based on the English Companies Act 1844, the first legislative enactment for registration of Joint Stock Companies was passed in the year 1850 and it also recognised companies as district legal entities. In 1950, the Government of India appointed a Committee to revise Indian Companies Act to bring it in line with the development of trade and industry in India and relying on the recommendations of the Committee, a bill to enact Companies Act, 1956 was introduced in Parliament.
The consolidation of the laws relating to company’s rules and regulation took place a long time ago with the establishment of The Companies Act, 1956 of 658 sections by the Government of India through Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. This Act explains about the whole procedure of the how-to form a company, its fees procedure, name, constitution, its share capital, about its general board meetings, management and administration of the company including an important part which is the directors as they are the decision-makers and their main responsibility and liabilities about the company matter the most.
The Companies Act, 20132 replacing the Companies Act, 1956 got passed by the Parliament and received the assent of the President of India on 29th August, 2013 which consolidated and amended the law relating to companies with more contemporary legislation. As amendment has been the Government’s groove activity, The Act has been amended by the Companies Amendment Act, 2015, 2017, 2019 and now, as proposed, in 2020. Even the purpose of the amendment is different every time ranging from the ease of doing business to corporate life.
Why Amendments Were Made?
As due to the current crisis going on in the lives of people, up till now of all the Companies Acts that were amended the Companies Amendment Act, 2020 primarily aimed to give liberty to the companies regarding some stringent provisions. This amendment was a good and revealing amendment for the companies. The two most major works done through this amendment was the drastic reduction of the penalties levied upon the companies and its officer in a lot of sections of this Act and insertion of a new chapter of “Producer companies” which was removed from the Companies Act, 2013. Through the reduction of the penalties, the Act gave liberty and relief to the companies in the real sense. The Government also through amendments proposes to provide greater ease of living to honest and law-abiding corporates.
Some Highlights of the Amendments –
- To decriminalise certain offences under the Act in case of defaults which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest.
- To empower the Central Government to exclude, in consultation with the Securities and Exchange Board, a certain class of companies from the definition of “listed company”, mainly for listing of debt securities;
- To clarify the jurisdiction of the trial court based on place of commission of an offence under section 452 of the Act for wrongful withholding of property of a company by its officers or employees, as the case may be;
- To incorporate a new Chapter XXI A in the Act relating to Producer Companies, which was earlier part of the Companies Act, 1956.
- To set up Benches of the National Company Law Appellate Tribute;
- To make provisions for allowing payment of adequate remuneration to non-executive directors in case of inadequacy of profits, by aligning the same with the provisions for remuneration to executive directors in such cases;
- To provide for a window within which penalties shall not be levied for delay in filing annual returns and financial statements in certain cases;
- To provide for specified classes of unlisted companies to prepare and file their periodical financial results;
- To allow direct listing of securities by Indian companies in a permissible foreign jurisdiction as per rules to be prescribed.
Significant Amendments to the Companies Act, 2020
Section 2(52) – Definition of “listed company”
The amendment seeks to insert a new proviso that enables the Central Government to exclude a certain class of companies, which have listed or intend to list such class of securities, as may be prescribed in consultation with Securities and Exchange Board of India, from the definition of listed companies.
Section 23 – Listing in Foreign Countries
The section elaborates on Public Offer and Private Placement which says that to allow a class of public companies to list certain class of securities on stock exchanges in permissible foreign jurisdictions.
Section 62 – Right Shares
The Central Government is empowered to prescribe days lesser than 15, for deeming decline of offer of the rights issue. This will reduce the timelines for applying for rights issues.
Section 117 (3)(g) – Exemption to NBFC, HFC inserted
The Central Government is empowered to exempt any class of NBFCs and any class of HFCs from the filing of resolutions passed to grant loans or give guarantees or to provide security in respect of loans in the ordinary course of their business. Earlier, only Banking Companies were exempted.
Section 129 A – Periodic Financial results audited or Limited review filing
A new section 129A has been inserted to empower the Central Government to provide by rules such class or classes of unlisted companies to prepare periodical financial results of the company, audit or limited review thereof and their filing with Registrar within 30 days from the end of that period as specified in the rules.
Section 135- Corporate Social Responsibility
Now, the companies, which spend an amount in excess of the requirement of 2%, will be allowed to set off such excess amount out of their obligation in the succeeding financial years after complying with the prescribed rules. New sub-section (9) has been inserted to provide that the requirement of constitution of CSR3 Committee shall not be applicable, in case the amount required to be spent on CSR does not exceed Rs. 50 lakhs and the functions of the CSR Committee in such a case, maybe discharged by the Board of directors.
Section 149 – Remuneration to independent director loss/ inadequacy
According to this new section, companies will be able to pay remuneration to Non-Executive Directors and Independent Directors in case of loss or inadequate profits under Schedule V as applicable to Executive Directors earlier.
Section 284 – Promoters, directors, etc., to cooperate with Company Liquidator
It provides that when a person required to assist a Company Liquidator does not do so, then the Company Liquidator may make an application to NCLT for necessary directions.
Section 378A- 378ZU -New Producer Company Chapter
A new Chapter as Chapter XXI A relating to Producer Companies4 has been inserted on similar lines as provided in the Companies Act, 1956.
Sections 393A – New Section for Exemption Added
A new section 393A has been inserted in the Act to empower the Central Government to exempt any class of foreign companies or companies incorporated or to be incorporated outside India.
Section 403 – Removing Twice Additional Fees
It empowers to the Central Government to prescribe higher additional fees for default in submitting, filing, registering or recording of prescribed documents on two or more occasions.
Section 410 -NCLAT constitution – Rectification
The restriction on the appointment of the number of judicial and technical members in the Appellate Tribunal by the Central Government has been removed.
Section 418A – Benches of Appellate Tribunal
A new section 418A has been inserted to provide for the constitution of Additional Benches of NCLAT and related provisions.
Section 435 – Special Court
It provides that the offence under section 452 i.e. punishment for wrongful withholding of property, will be excluded from the applicability of section 435 i.e. the Special Court.
Section 446B – Penalty got lesser & Producer Company and Start-up Company added to list
Section 446B has been substituted to provide for payment of lessor monetary penalty by a start-up company, Producer Company, One Person Company or small company on failure to comply with provisions of the Act which attract monetary penalties.
Section 454 – Immunity from adjudication
This is a very important amendment. A window has been provided within which penalties shall not be levied for delay in filing the annual return and financial statements in certain cases. It will reduce the chances of a monetary penalty being levied where the default is made good within a defined time.
Section 465 – Repeal of certain enactments and savings
After the introduction of new chapter XXI A on ‘producer companies’, the first proviso to sub-section (1) has been omitted which provides that the provisions of Part IX A of the Companies Act, 1956 shall apply to a producer company.
A corollary of the Amendments
Every Act has its consequences. Likewise, The Companies Amendment Act, 2020 has its consequences or impact on certain elements relating to the companies and also on foreign companies mentioned further. The Act requires specified classes of unlisted companies to prepare and file their periodical financial results at a frequency that will be notified later. This provision is aimed at improving corporate governance. The idea is to bring more transparency into the affairs of closely held companies, which are at times used by major shareholders in companies with the large public interest to divert funds through transactions that are not on arm’s length basis. Also, the provisions of the Act allow direct listing of securities by Indian companies in permissible foreign jurisdictions as per the rules to be prescribed. The said amendment will possibly help start-ups to tap overseas markets for raising capital. The Act has also made provision relating to lesser penalties for small companies and one-person companies, to all provisions of the Act which attract monetary penalties and also extend the same benefit to Producer Companies and start-ups. The owners of the companies got a relaxation in obligations relating to imposition of higher additional fees for default on two or more occasions in submitting, filing, registering or recording any document, fact or information.
The Government of India plans to endorse foreign investment and to further ease of doing business has led to decriminalising and liberalising India’s company law regime. Before the amendment, the Act encompassed of assorted criminal penalties for minor and technical non-compliance. Owing to such penal provisions in the Act, the investors were deterred from investing. The decriminalisation of offences under the Amendment Act will aid in reducing the prolonged criminal proceedings and vacate the case backlog, which prevails in the judicial system. Such backlog acts as a deterrence as the possibility of getting stuck in long-lasting litigation is high. Decriminalisation of offences under the Act is likely to yield intangible benefits in the form of protection of goodwill of a company that could otherwise get tarnished by criminal sanctions being inflicted for minor, technical or inadvertent lapses, leading to reputational damage.
Adapting to the current situation of pandemic and taking into consideration the situation of the people, companies, and other organisations of our country to relieve their stress and to benefit them by mending the laws accordingly is worth appreciating and commendable. Well, the Companies Amendment Act, 2020 intends to transfer considerable powers to Central Government, which will be exercised after consulting with the authorities, to offer exemptions and to give favourable treatment to such groups of corporations as deemed fit under Act.