Critical Analysis of The Companies (Amendment) Bill, 2019

It seems that the Companies Act, 2013 (‘the Act’) is being amended in every alternate year. After the Act was notified, the Companies (Amendment) Bill was introduced in the year 2015, 2017 and 2019. The amendments in the Companies (Amendment) Act, 2015 aimed at introducing the provisions for ease of doing business in India and aligning some provisions of the Act with SEBI Regulations. The Companies (Amendment) Act, 2017 aimed at addressing interpretation issues, eliminating government’s interference in the deciding the managerial remuneration, introducing provisions relating to significant beneficial ownership, etc.

Background of the Companies (Amendment) Bill, 2019: In order to give continued effect to the Companies (Amendment) Ordinance, 2018, the President promulgated Companies (Amendment) Ordinance, 2019 and Companies (Amendment) Second Ordinance, 2019 on January 12, 2019 and February 21, 2019 respectively. The Companies (Amendment) Bill, 2019 (‘the Bill’) seeks to replace the Companies (Amendment) Second Ordinance, 2019 with certain additional amendments. 

The Bill that was passed by the Rajya Sabha on July 30, 2019, attempts to declog the NCLT by significant reduction in cases for compounding of offences, declaration of commencement of business, protection of depositors, registration and management of charges, etc. The Bill also attempts to strengthen the in-house adjudication mechanism. The Bill has also introduced amendments relating to corporate compliance and corporate governance i.e. declaration of commencement of business, protection of public deposits, non-maintenance of registered office to trigger company de-registration process.

This article is an analysis few important provisions of the Bill which will have a significant impact on corporate compliances and litigation. 

(i) Significant Beneficial Owners: The Bill has introduced a provision in Section 90 of the Act, whereby every company shall take necessary steps to identify an individual who is a significant beneficial owner (‘SBO’) in relation to the company and require him to comply with the provisions of Section 90 of the Act. A non-individual shareholder may have diversified shareholding in its holding company and its ultimate holding company. Directing every reporting company to identify an individual as its SBO means detailed and independent analysis of each non-individual shareholder. According to the provisions of Section 90 of the Act, the primary responsibility of identifying SBO is on the shareholder only. However, the onus is now being shifted to the reporting company for identifying the SBO. Instead of said amendment introduced in the Bill, the Government should have amended critical provisions of the SBO Rules.

(ii) Corporate Social Responsibility: The amendments to Section 135 of the Act are quite significant. According to the amendments, the companies are now under an obligation to transfer the unspent CSR amount to Unspent CSR Account (opened in a scheduled Bank) and such amount shall be spent within a period of 3 financial years. If the company fails to spend such amount then the amount shall be transferred to a Fund specified in Schedule VII to the Act. If the company fails to spent the requisite CSR amount or fails to transfer requisite fund (as explained above), then:

(a) The company shall be punishable with fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 25,00,000/- and

(b) Every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000/- but which may extend to Rs. 5,00,000/-, or with both. 

Prior to the amendment, the Act did not provide for any penal provisions for non-compliance of any CSR provision. However, the provisions in the Bill w.r.t. amendment to CSR provisions are very significant. The intent of the Government is quite evident i.e. from ‘comply or explain’ to ‘an offence punishable with imprisonment or fine or both’. This ultimately means that CSR is Corporate’s Compulsory Social Responsibility. In quite a few governance matters, ‘comply or explain’ methodology is widely accepted. In the case of CSR, the activity being a social activity, the Government should not have a penal provision with fine or imprisonment for such non-compliance. In certain cases, such spending is not feasible due to liquidity crises, corporate restructuring activities, slow-down in business, heavy administrative cost, etc. Such reasons could be genuine. 

(iii) Unfit persons not to manage companies: According to the extant provisions of the Act, the Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the NCLT for an order to prevent oppression and mismanagement. In addition to the said provisions, the Bill has introduced some provisions wherein certain circumstances the Government may initiate a case against such person and refer the same to the NCLT for inquiries. The NCLT may record the decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with conduct and management of the company. The scope of the provisions is wide as it covers the office of directors and persons connected with conduct and management of the company i.e. CEO, CFO, CTO, COO, CS, etc. Instead of ‘persons connected with conduct and management of the company’, there ought to have been a reference of Key Managerial Personnel (which is already defined in Section 2(51) of the Act).The Bill has suggested some circumstances, which includes fraud, misfeasance, persistent negligence, breach of trust, business not conducted with sound business principles, business not conducted with prudent commercial practices, business conducted and managed with intent to defraud creditors, members, etc. The onus will be on the Central Government to prove that the said circumstances have been created by the director or any person connected with the conduct and management of the company. According to the Bill, such person (who is not ‘fit and proper’) shall not hold the office of a director or any other office connected with the conduct and management of the affairs of the company for a period of 5 years from the date of NCLT decision.

(iv) Compulsory De-mat for certain unlisted companies: The Bill has introduced the provisions wherein class or classes of unlisted companies shall be required to hold and transfer securities only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder. This amendment in the Act has been introduced by first amending the Companies (Prospectus and Allotment of Securities) Rules, 2014. 

The Bill ought to have considered some other important aspects in the Act, including: 

(i) Review of role, powers and duties of Auditors in the company,

(ii) Review of role, powers and duties of independent directors in the company,

(iii) Certain exemptions to start-ups and private companies,

(iv) Certain exemptions to not – for profit companies,

(v) Making One Person Company – a business-friendly organisation,

(vi) Ironing out interpretation issues in several provisions of the Companies Act e.g. managerial remuneration, managerial appointment, clarity in Rules under the Act, etc.,

(vii) Clarity in the Rules relating to SBO. 

Broadly, the Bill attempts to declog NCLT by significant reducing the cases for compounding of offences, introducing corporate compliance mechanism and strengthening in-house adjudication mechanism. However, the Government should make an attempt to align the Rules with the Act.