The Companies (Amendment) Act, 2019 replaces the Companies (Second Amendment) Ordinance, 2019 and also introduces some new changes. Some of the amendments brought in the Ordinance (which took effect from 02.11.2018) were reducing burden on NCLT by transferring powers under Section 2(41) and Section 14 to the Central Government, reducing burden on Special Courts by shifting 16 types of non –compliances to defaults attracting penalty instead of fine/imprisonment, reintroduction of declaration of commencement of business, etc. The gist of the new amendments along with the detailed version is given in the upcoming paragraphs; these new amendments take effect from 15.08.2019 except the one relating to CSR, which is not yet notified.
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1 Gist of Amendments
1.1 Gist of new amendments
• Compulsory dematerialization of shares: With the amendment to Section 29, the Central Government may in the future bring even private companies within the ambit of compulsory dematerialization of shares by issuing amendments to the Rules.
• Punishment under Section 90 to company in respect of failure to identify SBO: With the amendment to Section 90, even if a company does not take necessary steps to identify the SBO, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.
• Powers of NFRA: Hence, instead of debarring the member or firm from engaging in practice entirely, the proposed provision will empower the NFRA to debar the member or firm from being appointed as an auditor/internal auditor/undertaking any audit in respect of financial statements/internal audit of functions and activities of a body corporate/performing any valuation under Section 247.
• Application by Central Government to Tribunal under Section 241 for declaration of a person as not a fit and proper person to conduct the affairs of the company:
o With the proposed amendment to Section 241, the Central Government has been clothed with the power to apply to NCLT in certain cases with a request that the Tribunal may inquire into the case and record a decision as to whether or not a person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.
o The amendment to Section 243 is a consequential amendment to the amendment made to Section 241. The persons who are declared to be not a fit and proper person under Section 242(4A) by the NCLT shall not be permitted to hold the office of a director or any other office in connection with the conduct or management of the affairs of any company for a period of 5 years from the date of the decision. The Central Government may permit the person to hold such office before the expiry of 5 years with the leave of the Tribunal. Such person shall not be entitled to receive any compensation for loss or termination of office.
• Corporate Social Responsibility (not yet notified):
o Clarity in respect of calculation of the CSR contribution in case of new companies is provided. In case of companies which have not completed 3 financial years from incorporation, the average net profit shall be calculated in respect of the actual number of financial years preceding the financial year for which the contribution is calculated.
o The company should not only disclose the reasons for not spending the CSR contribution in the Board’s Report but also transfer any unspent amount to the Fund specified in Schedule VII within 6 months from the end of the financial year. In case of ongoing projects as given below, the following provision shall apply.
o The unspent CSR amount in case of ongoing projects must be transferred by the company within 30 days from the end of financial year to a separate bank account of the company for that financial year to be called Unspent CSR Account and the amount shall
be spent within 3 financial years. Otherwise, if the amount is not spent within 3 financial years, the amount must be transferred to the Fund specified in Schedule VII within a period of 30 days from the date of completion of the 3rd financial year.
o In case a company does not spend the CSR amount or does not comply with the provisions relating to unspent amount, the company shall be punishable with fine of minimum Rs. 50,000 and upto Rs. 25 Lakhs and officer in default shall be punishable with imprisonment for a period upto 3 years or with fine of minimum Rs. 50,000 upto Rs. 5 Lakhs or with both.
o The Central Government is vested with the power to give directions to a company or class of companies to ensure compliance with the provisions of Section 135.
1.2 Gist of amendments brought in by the Ordinance
• In-house Adjudication Mechanism: 1. Instituting a transparent and technology driven in-house adjudication mechanism on an online platform and publication of the orders on the website. 2. Strengthening in-house adjudication mechanism by necessitating a concomitant order for making good the default at the time of levying penalty, to achieve the ultimate aim of achieving better compliance.
• Reducing burden on Special Courts: Shifting of jurisdiction of 16 types of corporate offences from the special courts to in-house adjudication, which is expected to reduce the case load of Special Courts by over 60%, thereby enabling them to concentrate on serious corporate offences. With this amendment the scope of in-house adjudication has gone up from 18 Sections at present to 34 Sections of the Act.
• Reducing burden on NCLT by: 1. Enlarging the pecuniary jurisdiction of Regional Director by enhancing the limit up to Rs. 25 Lakh as against earlier limit of Rs. 5 Lakh under Section 441 of the Act; 2. Vesting in the Central Government the power to approve the alteration in the financial year of a company under section 2(41); and 3. Vesting the Central Government the power to approve cases of conversion of public companies into private companies.
• Rationalization of penalty for small companies: The penalty for small companies and one person companies has been reduced to half of that applicable to normal companies.
• Re-introducing declaration of commencement of business: Re-introduction of declaration of commencement of business provision to better tackle the menace of ‘shell companies’.
• Towards better corporate governance: Greater accountability with respect to filing documents related to creation, modification and satisfaction of charges; non-maintenance of registered office to trigger de-registration process; and holding of directorships beyond permissible limits to trigger disqualification of such directors.
The Compliance Office 