Companies (Amendment) Act, 2020

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The Companies (Amendment) Act, 2020 brings in many important reforms which are the need of the hour, which inter alia, include decriminalization of several offences and insertion of a new chapter on Producer Companies. The Act was passed by the Lok Sabha on 19^th September, 2020 and by the Rajya Sabha on 22^nd September, 2020. It received the assent of the President of India on 28^th September, 2020. A copy of the notification is available here: http://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf  

These amendments are based on the Report of the Company Law Committee dated 14^th November, 2019, which can be accessed here: http://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf The Committee was set up on 18^th September, 2019 to make recommendations, inter alia, on recategorization of criminal compoundable offences inviting punishment imposable by Courts to civil defaults inviting penalty which may be imposed by the adjudicating officer. It may also be noted that it is the second such set of reforms in the matter of recategorization of offences, with the first set being carried out in the form of the Companies (Amendment) Act, 2019. Certain other changes relating to ease of doing business and ease of living are also recommended by the Committee in its present report.

The Act contains 66 amendments, which we shall discuss under two heads, substantive changes and those relating to offences and penal provisions.

Gist of Amendments

The gist of the reforms brought about is given below:

• List of key substantive changes:
  • Change in the definition of listed companyunder section 2: Power is inserted to exempt certain classes of companies having certain classes of securities listed vide Rules to be prescribed in consultation with SEBI.
  • Rectification of name of company under section 16: In respect of rectification of name of a company, if the Government orders a company to change the name on the grounds of an application made by the owner of a trademark, it needs to be complied within 3 months instead of the 6 months presently provided.
  • Listing in foreign jurisdiction: Introduction of provision for listing of securities by public companies in foreign jurisdiction along with power to exempt such companies from the provisions of Chapter III, Chapter IV, Sections 89, 90 and 127.
  • Rights Issue under section 62(1)(a): In respect of rights issue, instead of the minimum offer period of 15 days, it is amended to 15 days or such lesser number of days as prescribed. This will pave way for speeding up rights issues.
  • Beneficial holding under section 89: Power is given for exempting certain classes of persons from declaration of beneficial holding.
  • Filing of Form MGT-14 under section 179(3): In respect of filing of resolutions passed by the Board under Section 179(3) for granting loans or giving guarantee or providing security in respect of loans in the ordinary course of business, apart from banking companies, it is proposed to exempt classes of NBFCs, housing finance companies also from filing Form MGT-14.
  • New section 129A – periodical financial results: New section 129A is inserted to provide that the Central Government may require classes of companies to prepare financial results on a periodical basis as may be prescribed, to complete Board approval, audit/limited review and file a copy with the Registrar within 30 days.
  • CSR under section 135: In respect of CSR amendment is inserted to provide for carry forward of CSR amount spent in excess in a financial year for subsequent financial years as may be prescribed and also to exempt companies with amount to be spent less than or equal to Rs. 50 lakhs from constituting a CSR committee.
  • Remuneration to IDs in the event of inadequate profits: Proviso to section 149(9) introduced which gives scope for payment of remuneration to independent directors in the absence of or inadequacy of profits in accordance with Schedule V. In line with proviso to section 149(9), section 197(3) is amended to provide for payment of remuneration to independent director in the event of absence or inadequacy of profits.
  • Producer companies: Introduction of a new Chapter XXIA on Producer Companies and consequent repeal of the relevant provisions of the Companies Act, 1956.
  • Foreign companies: Central Government is empowered to exempt any class of foreign companies and companies incorporated outside India from complying with Chapter XXII.
  • Penalties: In respect of adjudication of penalties, the adjudicating officer shall not impose penalty and all proceedings shall be deemed to be concluded in respect of non-compliance of filing of annual return or financial statements under Sections 92 and 137 respectively if such default is rectified prior to or within 30 days of issue of notice by the adjudicating officer. Further, reduced penalties in respect of OPCs, small companies and start-up companies is introduced.
  • Additional fee – section 403: Minimum additional fee of twice the regular additional fee has been leviable in case of defaulting on two or more occasions in respect of filing. Now the minimum additional fee has been substituted with payment of higher additional fee as may be prescribed.
  • NCLAT: The maximum cap on the number of Members of NCLAT is proposed to be removed. Insertion of new Section 418A – Benches of Appellate Tribunal to provide for establishment of new Benches of NCLAT.
  • Wrongful possession of dwelling unit: Under section 452, imprisonment of officer or employee shall not be ordered for wrongful possession of a dwelling unit in case the company has not paid to such officer or employee retirement benefits or compensation payable. Offences under section 452 shall not be tried by Special Courts.

• Relaxation and re-categorisation of criminal compoundable offences:

Except a few serious frauds involving public interest, many compoundable offences have been recategorized into civil wrongs which attract penalty. It is to be noted that while penalty is seemingly less harsh, still there are consequences for the corporates and professionals, because penalty, unlike punishment, can be imposed by the adjudicating officers (RoCs) and usually the penalty is a fixed amount.

• Decriminalisation of offences under 21 sections, wherein offences inviting punishments in the form of fine and/or imprisonment are converted into defaults inviting penalty, which the adjudicating officer has the power to impose instead of burdening the Courts. These, inter alia, include those relating to charges, declaration of beneficial interest, declaration of significant beneficial ownership, certification of annual return, financial statements, unpaid dividend account, CSR, disclosure of interest by director, etc.
• As a further measure towards decriminalization of offences, in respect of offences under 10 sections, the penal clause has been done away with. These include penal clauses in respect of rectification of name of company, variation in rights, etc. However, an alternative mode of dealing with the non-compliance has been provided wherever necessary.
• In respect of non-compliance under 6 sections, the quantum of penalty has been reduced, for example in respect of default in filing of Form SH-7, Annual Return, financial statements, Form MGT-14, etc.
• In respect of offences under 12 sections, the punishment now involves only fine instead of fine or imprisonment or both – for instance, in respect of non-compliance under section 8, contents of prospectus under section 26, buyback of securities, vacation of office of director, etc.