Company Amendment Bill, 2020

Ease of doing business in India and paving a way for Public Listed Companies to raise capital from foreign market

The Company Amendment Bill, 2020 which was introduced by the Finance Minister of India in March, 2020 with a view to promote ease of doing business and ease of living to corporates in India has been approved by the Indian President after it was passed by Lok Sabha on 19th September. The Bill is to introduce certain modifications in the Companies Act, 2013. These amendments are based on the recommendations submitted by Company Law Committee that comprised of well-known industry and legal experts.

The recommendations made by the Committee were widely based on decriminalization of certain offences, reorganizing of criminal compoundable offences into civil offence with civil liabilities, rationalizing the penalties, building a strategy to reduce overall pendency of disputes and some other ancillary amendments that could address the emerging issues which have significant impact of corporates in India.

The Bill comes at a time when companies are reeling under stress due the COVID19 pandemic. In this article, we have discussed some of the important amendments that have been introduced by the Bill and their impact on the corporates.

Overview of the Major Amendments:

1) Changes in Offences: The Bill removes penalty and imprisonment in certain offences as well as reduces the amount of fine payable. Examples:

  • It removed penalties which apply for any change in the rights of a class of shareholders made in violation of the Act.
  • Imprisonment of three years applicable to a company buying back its shares without complying with the Act has been removed by the Bill.
  • Reduced the fine for failure of filing the annual return with ROC from five lakhs to two lakhs.

The Bill re-categorized 23 out of 66 compoundable offences mentioned under the Act in case of defaults which lack an element of fraud or do not involve larger public interest and can be ascertained objectively. Compoundable offences are those which can be settled between both parties by paying a certain amount of money without the requirement of permission of the Court. Such cases will be dealt with an in-house adjudication framework.

Benefit: Decriminalization of various offences will promote Ease of doing ethical and honest business. This will also boost the confidence of the investors and motivate the business as the fear of imprisonment will be reduced. The said decriminalization is only for minor, technical and procedural faults which don’t involve any kind of fraud, injury to the public interest or non-compoundable offences.

2) Producer Companies: Certain provision of Companies Act, 1956 still continue to apply to producer companies under the 2013 Act. These provisions are related to their membership, conduct of meetings and maintenance of accounts. The Bill has removed these provisions and added a new chapter to the Act with similar provisions for such companies. Producer companies include companies which are engaged in the production, marketing & sale of agriculture produces and sale of produce from cottage industries.

3) Direct Listing in Foreign Jurisdiction: Under the current framework, Indian companies cannot directly list their securities abroad without first being listed in domestic bourses. However, the Bill empowered the Central Government to allow public companies to directly list certain prescribed classes of securities in foreign jurisdictions.

Benefit: This would help the corporates especially start-ups to tap foreign market and provide them another source of raising capital from overseas.

4) Remuneration to Non-Executive Directors: Companies Act, 2013 has a special provision for payment of remuneration to executive director of a company in case where the company has inadequate or no profits during the year. The Bill has now extended that provision to non-executive directors including independent directors.

Benefit: This could motivate the non-executive directors and enhance their productivity because of increased remuneration.

5) Penalties: Under the Act, one-person or small companies are liable to pay only 50% of the penalty of certain offences such failure to file annual return. The Bill extends this provision to all producer companies and start-ups. It further extends this provision to apply in case of violation of any provision of the Act and limits the amount of maximum penalty to Rs. 2 lakhs for the company and Rs. 1 lakh for defaulting officer.

6) Exemption from Filing Resolutions: The 2013 Act requires companies to file certain resolutions with ROC such as resolution for Board of Directors of the company to borrow money or grant loans. Under the Act, banking companies are exempted from such fillings and now the Bill has extended that exemption to NBFCs and Housing Finance Companies.

7) Periodic Financial Results & Audit: Prescribed class of unlisted companies will now have to periodically prepare and file their financial results and also complete audit or review of such results. Further, the Bill provides a timeline within which penalties shall not be levied for delay of filing the annual return.

Benefit: This will improve corporate governance and bring in transparency in the case of closely held companies which are generally used by major shareholders of large public interest companies to divert funds through transactions that are not on arm’s length basis.

8) Corporate Social Responsibility: As per section 135 of the Act, companies with net worth (turnover or profits) above a specified amount are required to constitute CSR committee and spend 2% of their average net profits of last three years towards company’s CSR policy. The Bill has exempted companies with a CSR liability of up to Rs. 50 lakh a year from setting up a CSR Committee. It also allowed companies that spend any amount in excess of their CSR obligation in a year to set off the excess amount towards their CSR obligation in the subsequent financial years.

9) Declaration of Beneficial Interest: Under the Act, if a person holds beneficial interest of at least 10% shares in a company or has significant control over the company, he/she is required to make a declaration of their interest to the company and the said company is required to note that declaration is separate register. The Bill empowers the Central Government to exempt any class of persons from complying with such requirement if it considers necessary in the interest of public.

10) Exclusion from listed company definition:  The Bill empowered the Central Government, in consultation with SEBI, to exclude companies issuing specified classes of securities from the definition of a “listed company”. This majorly applies to the companied that issue debt securities.

11) Timeline for Rights Issue reduced: With an aim to speed up the process of rights issue u/s 62, timeline for applying for rights issue have been reduced from 15 days to such lesser prescribed number of days and not exceeding 30 days from the date of the offer within which if the offer is not accepted, it shall be dement to have been declined.

12) Appellate Tribunal Benches: The Bill seeks to add section 418A to establish 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.

Benefit: The addition of further NCLAT Benches would ease their burden, assist in reducing any backlog as well as allow litigants easier access to the appellate body.

Conclusion:

The Bill would help to achieve the goals of the Government and can be considered a major step in right direction that would facilitate the operations and growth of companies in India. The big changes made to decriminalize and re-categorize the offences would encourage ease of doing business by corporates. This would also expedite the National Company Law Tribunal (NCLT). Further the lower penalties to start-ups and producer companies would definitely reduce the burden of compliances on such companies and create a more proactive environment for doing business.

Another thoughtful change of including provisions of Producer Company from the 1956 Act would provide a boost to the companies engaged in production, marketing and sale of agriculture produce and sale of produce from cottage industries. Further, setting up NCLAT benches would help in decreasing the number of pending cases and accelerate the settlement of disputes. Allowing Indian companies to list their shares on foreign stock exchanges is an interesting move which would make it easier for public listed companies to gain access to overseas market to raise capital and hence, providing them another source of capital.