The Central Government had, in continuation of its efforts to facilitate greater "ease of living to law abiding corporates", formed the Company Law Committee (CLC) on 18 September 2019 comprising of representatives from the "Ministry, industry chambers, professional institutes and the legal fraternity". The CLC submitted its report on 14 November 2019 (CLC Report). Based on the CLC Report, the Ministry of Finance has introduced the Companies Amendment Bill 2020 (Bill) which seeks to make extensive amendments in the Companies Act 2013 (Act) primarily with a two-fold objective of:
- Decriminalising "minor procedural or technical lapses...into civil wrongs" and adopting a principle based approach "to further remove criminality in case of defaults, which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest" 1; and
- Providing certain relaxations and benefits for greater ease of living to corporates.
A broad overview of the objective and scope of the proposed amendments is provided below.
- Decriminalisation of Certain Offences
While several changes have been proposed, the key changes are as follows:
(a) Contravention of provisions in relation to 'Registration of Charges' created by a company on its assets, under Chapter VI of the Act.
(b) Contravention of provisions relating to audit and auditors of the company (§139-146 of the Act) and occupation of the office by a director despite having knowledge of being disqualified under §167(1) of the Act and/or acting as a managing director/director/manager in contravention of §243(1)(b)2 of the Act.
(c) Failure to disclose concerns and interests by directors in other firms or corporate bodies under §184(1) and (2) of the Act or entering into or authorising 'related party transactions' in contravention of §188 of the Act.
(d) Contravention of provisions relating to merger and amalgamation of companies under §232 of the Act or non-compliance with orders of any authority under §441(4) of the Act for compounding of offences.
This effort to decriminalise certain offences is a supplementary measure as the Central Government had, through the Companies Amendment Act 2019, already converted 16 compoundable non-compliances from criminal to civil wrongs attracting only a monetary penalty. The adjudication of transgressions attracting only a monetary penalty is to be carried out by the In-house adjudication3 mechanism, the framework for which is already in place 4.
- Producer Companies
The CLC Report defines a 'Producer Company' as "a body corporate comprising of farmers and agriculturists who work in cooperation with each other to promote better standards of living and gain easier access to credit, technology, market etc".
The concept of 'Producer Companies' was introduced in 2002 with the insertion of Part IXA in the Companies Act 1956, with a view to regulate the Indian agriculture sector. The Bill seeks to re-introduce Part IXA, with suitable modifications, as a separate chapter - "Chapter XXIA" (i.e. §378A – §378ZU) - which provides an extensive framework for 'producer companies', including relaxations, benefits and lenient regulation of such companies for development of the Agrarian Economy.
The Bill specifies the activities which would allow for classification of a company as a 'Producer Company' in §378B. These activities range from direct production of 'Primary Produce' to insurance, welfare facilities, machinery & equipment, financing, consultancy services and others in relation to 'Primary Produce'.
- Exclusions from 'Listed Company' and Overseas Listing of Securities
(a) The Bill seeks to empower the Central Government to exclude, in consultation with SEBI, certain class of companies from the definition of a "listed company", primarily in cases where private companies choose to have their debt securities listed on a stock exchange. Per the present framework comprising of, inter alia, the SEBI Rules, a private company having a debt security listed on the stock exchange is treated as a 'Listed Company' for the purposes of the Act.
(b) Under the proposed §23(3) of the Bill, the Central Government has been empowered to allow a class of public companies to issue a specified class of securities for listing on stock exchange(s) in permissible foreign jurisdictions or such other jurisdictions as may be specified.
- Corporate Social Responsibility (CSR)
A new proviso to §135(5) of the Act would allow a company, which spends an amount in excess of the requirement under §135, to set off such excess amount from the spending requirements in subsequent years. Maximum limit of penalties prescribed for companies under §135(7) of the Act is proposed to be increased from Rs.2,500,000 to Rs.10,000,000, while omitting imprisonment of officers for violation of CSR provisions under §135(5) and §135(6). The requirement of setting up a Corporate Social Responsibility Committee is done away with if the prescribed budget towards CSR is below Rs.5,000,000.
A few other proposed relaxations include grating power to the Central Government (under the proposed §23(4)) to, inter alia, exempt any class of public companies from the rigors relating to the regulation of disclosure of beneficial interest in shares and disclosure of beneficial interest if the same is found to be in public interest.
Penalties payable under the Act by (i) 'One Person' companies; (ii) Small companies; (iii) Start-up companies; (iv) Producer companies and (v) officers of such foregoing companies, shall be half of the penalties prescribed under the concerned provision(s) for other companies. Additionally, such penalties are proposed to be capped at (i) Rs.200,000 for the foregoing companies and (ii) Rs.100,000 for officers of such companies.
- Benches of the NCLAT
The Bill seeks to introduce §418A for setting up benches of the National Company Law Appellate Tribunal (NCLAT) at places other than Delhi, which may be notified by the Central Government in consultation with the Chairperson of the NCLAT. The ceiling on the maximum strength of the NCLAT (11 members) under §410 of the Act has been proposed to be removed by the Bill.
The Bill seeks to introduce certain anticipated relaxations which could, potentially, not only save the costs associated with compliance requirements, but also aid in promoting the focus on business and commerce. The Bill appears to reduce the effective burden on Start-ups and SMEs, by the relaxations focusing on comparatively harmless non-compliances by new companies stemming from lack of experience and/or inadequate resources (which may also be relevant in the case of small and medium sized companies).
It is interesting and crucial to note that the Bill seeks to delegate substantial powers to the Central Government, exercisable after consultation with authorities as applicable, to grant exemptions and allocate beneficial treatment to certain classes of companies as deemed fit under the Act.
While the decriminalising of certain offences is likely to be viewed by corporates in India as a welcome change, it is possible that certain groups at the other end of the spectrum may take the position that the Bill has perhaps gone a step too far in as much as some of the non-compliances, proposed to be decriminalised, possibly impacts the broader public interest.
The addition of further NCLAT Benches and the proposal for removing the ceiling on the maximum strength of the judges would assist in reducing any backlog as well as allow litigants easier access to the appellate body.
It will be interesting to note the final form in which the Bill is passed by the Indian Parliament, and whether any further amendments are proposed to the Act in the wake of the current pandemic.
1 Statement of Objects and Reasons of the Bill.
2 §243(1)(b) of the Act provides that where the NCLT terminates, sets aside or modifies an agreement under §242(2), "no managing director or other director or manager whose agreement is so terminated or set aside shall, for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the managing director or other director or manager of the company. ......"
3 §454 of the Act.
4 The Companies (Adjudication of Penalty) Rules 2014 [Notification No GSR 254 (E) dated 31 March, 2014], amended by the Companies (Adjudication of Penalties) Amendment Rules 2019 which can also be found at https://www.mca.gov.in/Ministry/pdf/AdjudicatioPenalties2019_20022019.pdf
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