Companies (Amendment) Act, 2020 – 10 key takeaways
Companies Amendment Act, 2020 (Amendment Act) amends the Companies Act, 2013 (Principal Act) and is the latest in a long line of amendments made since passing of Principal Act. Amendment Act, in its Bill form, had been passed by Lok Sabha on September 19, 2020 and by Rajya Sabha on September 22, 2020. It received the assent of the President on September 28, 2020 and became operative from that day onwards.
The amendments most likely to have a significant impact on India Inc are discussed here in below:
- Reduction in penalties and decriminalization of certain
offences not involving fraud: Following in the steps of
Companies (Amendment) Act, 2019, the Amendment Act also attempts to
omit imprisonment as a punishment for a multitude of offences which
are procedural and technical in nature. The amount of penalty too
has been drastically reduced in many instances. Here are a few
- Where the contravention of provisions relating to issue of prospectus would attract a term of up to three years under the Principal Act, now the same has been completely done away with but the penalty amount has been maintained at the same level.
- Regarding provisions relating to the requirement that investments made by a company are to be held in its own name, imprisonment has been removed, penalty has been reduced from INR 25,00,000 to INR 5,00,000 in case of a company and from INR 1,00,000 to INR 50,000 in case of officer in default.
- Where a register of members is not maintained as provided for in the Principal Act, the punishment of continuing penalty has been replaced by introducing only a fixed amount of penalty.
- The provision under the Principal Act of one person companies and small companies being liable only for 50% of the penalty mentioned in case of certain offences has been extended to all producer companies and start-up companies by the Amendment Act, subject to a maximum limit of INR 2,00,000 in case of a company and INR 1,00,000 in case of defaulting officer.
- Exclusion of certain companies from the definition of 'listed company': The Principal Act defines a 'listed company' as a company having any of its securities listed on any recognized stock exchange. Further, a reading of the private placement provisions under the Principal Act along with the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 permits certain private companies to list debt securities on a recognized stock exchange. These private companies are considered to be 'listed companies'. Consequently, they become subject to strict compliance requirements (such as those relating to filing of annual returns, maintenance of records, appointment of independent directors & woman director, etc.) which are burdensome for such private companies to adhere to. Hence, the management of such companies tends to feel dis-incentivized from carrying out listing of the companies' debt securities. The Amendment Act now empowers Central Government to exclude, in consultation with Securities and Exchange Board of India (SEBI), companies issuing specified classes of securities from the definition of 'listed company'. While the relevant details will be prescribed in the rules after detailed consultations between Ministry of Corporate Affairs (MCA), SEBI and other stakeholders, hopefully with this amendment, private companies will no longer feel dis-incentivized to seek listing of their debt securities.
- Reduction in timeline for applying for right issue: A right issue is an offer made available for a specified period to existing shareholders of a company, which allows them to purchase further share capital in the company in proportion to their current holding. As per the Principal Act, a minimum time of 15 days is required to be given to the existing shareholders for them to accept the offer. Now, as per the Amendment Act, companies offering right issue will not be required to give a notice period of minimum fifteen days. This will help companies to raise funds in a quicker manner. While a 2015 notification of the MCA had previously provided a similar relaxation, this had been limited to private companies.
- Direct listing option in foreign jurisdictions: The Amendment Act empowers the Central Government to allow certain classes of public companies to list classes of their securities in permissible foreign jurisdictions. This amendment aims to allow for raising of funds from foreign markets to companies beyond listed companies, as was the case previously, and by easing current cumbersome regulatory requirements
- Declaration of Beneficial Ownership: As per the previous norms under the Act, persons holding beneficial interest in the shares of a company are required to submit declarations to this effect and the company is required to file returns with the Registrar intimating such beneficial ownership. The Amendment empowers the Central Government to exempt, unconditionally or subject to conditions, certain classes of person(s) from the aforesaid requirements if it is considered necessary to grant such exemption in the public interest.
- Periodic financial results: Section 129A of the Amendment empowers the Central Government to require a certain class of unlisted public companies (which is yet to be prescribed) to prepare periodic financial results. Such periodic financial results are in addition to preparation of annual financial results prescribed under the Act and would need to be approved by the Board of Directors and audited (or subjected to a limited review) by the statutory auditors, in addition to filing periodic financial results with the Registrar. This requirement appears to have been introduced in alignment with similar provisions prescribed for listed companies under the LODR. Given that certain class of public companies will be permitted to list their securities in foreign jurisdictions, without listing on Indian stock exchanges, it is no surprise that the Amendment imposes an additional requirement on unlisted public companies to prepare periodic financial results thereby allowing the Central Government or the Ministry of Corporate Affairs (MCA) to keep a close watch on the functioning of such companies on a periodic basis and not just on an annual basis as per existing provisions of the Act.
- Remuneration to independent directors: The Principal Act specially provides for payment of remuneration to executive directors of a company, if in the year, the company has no profits or inadequate profits. The Amendment Act extends this provision to non-executive directors, including independent directors. This has been done in order to bring about alignment and to ensure retention of directorial talent in the company.
- Significant changes in certain provisions relating to
Corporate Social Responsibility (CSR): Under the Principal
Act, companies with net worth, turnover or profits above a
specified amount are required to constitute a CSR Committee and
spend at least 2% of their average net profits in the last three
financial years towards CSR. The following amendments relating to
CSR find their place in the Amendment Act:
- Companies which have CSR spending obligation not exceeding INR 50,00,000 are now not required to constitute a Corporate Social Responsibility Committee
- Where companies end up spending in excess of their CSR obligation in a particular financial year, the set of off of such excess spending will now be allowed to be made in subsequent years
- Exemption to NBFCs: Under the Act, a banking company is exempted from filing the resolutions passed to grant loans or give guarantee or provide security in respect of loans in the ordinary course of its business, with the Registrar. The Amendment extends such exemption to a registered non-banking finance company and a housing finance company.
- Reduced timeframe for rectification of name and powers granted to the Central Government thereunder: Prior to the Amendment, if the Central Government is of the opinion, on an application made to it by a registered proprietor of a trademark, that the name of a company is identical with or too closely resembles an existing trade mark, the company is required to change its name within a period of 6 months from date of directions issued by the Central Government in this regard. The Amendment now reduces this timeframe to 3 months. Additionally, Central Government is now empowered to allot a new name to the company (manner to be prescribed) if the company defaults in complying with directions issued by it and the Registrar is entitled to enter such new name in the Register of Companies in place of the old name and issue a fresh Certificate of Incorporation with the new name, which the company must use thereafter. However, none of the above changes restrict a company from subsequently
The Amendment Act has squarely addressed a range of issues that corporate India had been grappling with for some time now. It is, however, important to note that many of the amendments still require further clarification and the Amendment Act, 2020 with respect to overseas listing, scope of listed companies, beneficial ownership and other aspects will be tested once the Central Government notifies and prescribes corresponding rules in this regard. Needless to state, de-criminalization of menial offences revolving around procedural requirements and having no negative impact on the public interest will definitely go a long way on easing the burden on corporates from being criminalized for offences that are a product of inadvertent lapses and minor non-compliances with no intent to defraud the authorities or the public at large. All in all, this is a welcome move towards India's goal to improve the ease of doing business in the country.
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