In light of the Central Government’s aim to streamline processes and promote ease of doing business in India to give a fillip to the economy as a whole, the Central Government has introduced the Companies (Amendment) Bill, 2020 (“Bill”) before the Lok Sabha on the 17th of March, 2020. The Bill is based on the recommendations of the Company Law Committee Report of November 2019 (“CLC Report”) which had proposed de-criminalization of minor procedural or technical offences under the Companies Act, 2013 (“Act”) to enable ease of doing business for corporates and other stakeholders. The Bill shall come into force on such date as the Central Government may notify.
The key amendments proposed via the Bill to the provisions of the Act can be classified into the following categories:
- De-criminalization of Offences: The Bill aims to decriminalize certain offences under the Act. The intent is to cover offences which can be determined objectively, and which otherwise lack any element of fraud, or do not involve larger public interest like keeping of books of account of the company other than at its registered office or at any other place in India without board’s approval or disclosure of interest in other companies by director at the first meeting of the board in every financial year or change in interest thereafter. Furthermore, the Bill proposes an in-house adjudication framework for certain offences and reduces/ removes imprisonment sentences and penalties for several offences such as penalties which apply for any change in the rights of a class of shareholders made in violation of the Act. What is crucial to note is that certain compoundable offences, will no longer have imprisonment as a consequence, which in the opinion of most experts was quite draconian. Similarly, lesser monetary penalties are proposed for one person companies, small companies, start-ups, and producer companies.
- Ease of Doing Business: For the ease of doing business, certain amendments to the Act have been proposed in the Bill. Illustratively, reduced timelines are proposed for applying for rights issues so as to speed up such issuances under Section 62 of the Act. Similarly, exemptions are proposed to registered NBFCs and Housing Finance Companies from filing resolutions under Section 117 (Resolutions and agreements as prescribed under the Act to be filed with registrar within 30 days of passing or making thereof) of the Act. The Bill also proposes that certain specified classes of unlisted companies (which will be notified later on by government) shall prepare and file their periodical financial results within specified periods with the registrar. A new Section 393A is proposed to be included in the Act to empower the Central Government to exempt foreign companies and companies incorporated outside India, from the provisions under Chapter XXII of the Act (which deals with companies incorporated outside India), which would be a welcome step by such entities.
- Renumeration to Non-Executive and Independent Directors: A new provision is proposed to be inserted due to which a Company, which has no profits or if the profits are inadequate, shall be able to provide remuneration, exclusive of any fees payable under Section 197, in accordance with the provisions of Schedule V, to an independent director . Further, Section 197(3) of the Act, which provides for payment of remuneration to key managerial personnel in case of no profit or inadequate profits in accordance with Schedule V of the Act, is proposed to be amended to include Non-executive and Independent Directors within its ambit as well wherein non-executive directors including independent directors may receive remuneration irrespective of no profits or inadequate profits in the company. This should act as incentive for qualified individuals to act as independent directors, hence enriching the ecosystem.
- Definition of ‘Listed Company’: The CLC Report explained that private companies that offer debt securities (such as NCDs) via private placement come within the definition of listed companies under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013. Consequently, a private company that lists any debt securities on a stock exchange is required to comply with all the obligations of a listed company such as filing of annual returns, maintenance of records, and appointment of auditors, which are quite onerous for a private limited company. The Bill now proposes to empower the Central Government to exclude, in consultation with SEBI, certain classes of companies from the definition of ‘listed company’, mainly for listing of debt securities.
- Direct Listing on Foreign Stock Exchanges: A significant amendment has been proposed to Section 23 of the Act, thereby opening doors for an Indian company to directly list its securities on permitted stock exchanges in permissible foreign jurisdictions. Consequently, the Central Government may exempt certain classes of public companies from the provisions of Chapter III (Prospectus and Allotment of Securities), Chapter IV (Share Capital and Debentures); Sections 89 (which requires a person to make a declaration to the company of his beneficial interest and any change in the same), Section 90 (which requires a company to maintain a register of significant beneficial owners) and Section 127 (which provides punishment to the company and its directors on failure to pay dividend, subject to certain exception of the Act). SEBI’s Expert Committee had released a report in December 2018 to examine, inter-alia, various legal, operational and regulatory constraints in facilitating Indian companies to directly list their equity shares on foreign stock exchanges and provide a framework for direct listing. Under this Report a ‘permissible foreign jurisdiction’ is defined as one which has treaty obligations to share information and cooperate with Indian authorities in the event of any investigation such as members of the Board of International Organization of Securities Commissions and the Financial Action Task Force. The Report also recommends introduction of a Part B in Schedule 1 of FEMA 20R for purchase of equity shares of an Indian company listed on a foreign stock exchange by a non-resident, in addition to amendments in the Companies Act, 2013 and Rules thereunder, SEBI Regulations, Income Tax Act, 1961 and Rules thereunder, KYC and Anti-Money Laundering requirements.
- Producer Companies: The Bill proposes introduction of a new Chapter XXIA to the Act with a proposal to define a ‘producer’ as a person engaged in any activity connected with or related to any primary produce. Any 10 or more producers or any 2 or more “Producer Institutions”, or a combination of 10 or more producers and Producer Institutions can form a ‘producer company’ which is a body corporate whose main objects relate to providing, inter-alia, processing, manufacturing, consultancy and training services to its members. The liability of members is limited by the amount on unpaid shares held by them individually. This Chapter XXIA makes provisions in relation to incorporation and management of such companies, directors, conduction of general meeting, share capital criteria and members rights in relation thereto, loans to member and investments, merger and amalgamation and penalties for contravention of the provisions.
- Corporate Social Responsibility (“CSR”): The Bill proposes that a company which spends in excess of the requirements under Section 135(5) of the Act can set-off such excess expenditure against the requirements to spend for subsequent years. A company in violation of sub-section (5) or (6) of Section 135, deals with the manner in which the expenditure to be made towards CSR activities by the company, will be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the unspent CSR Account, as the case may be, or INR 1,00,00,000, whichever is less. Further, where the amount to be spent by a company under the said Section of the Act does not exceed INR 50,00,000, the need to constitute a CSR Committee will not be applicable on such company, and in such cases the functions of the CSR Committee will be discharged by the Board of Directors of such company, thus putting less procedural burden on such companies.
- Beneficial Interest: The Bill proposes a new provision in Section 89 of the Act (which deals with disclosure of beneficial interest) which enables the Central Government to exempt certain classes of persons from complying with the requirements of all except one provision of said section of the Act, if it considers necessary to grant such exemption in the public interest subject to such conditions as may be specified in the notification.
The changes proposed by this Bill are a significant step in increasing competitiveness amongst companies incorporated in India and stimulating efficiency and growth. The de-criminalization of certain provisions, depending upon the gravity of the offence, and the various exemptions provided to different classes of companies provide further ease of doing business for corporates in the country and we believe this should also lead to de-clogging of the already overburdened criminal justice system in the country.
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