ANALYSIS OF COMPANIES (AMENDMENT) BILL, 2020

ANALYSIS OF COMPANIES (AMENDMENT) BILL, 2020

This Article is written by Nashita Nazneen. A from B. S. Abdur Rahman Crescent Institute of Science and Technology Crescent School of Law.

INTRODUCTION:

Finance Minister, Mrs. Nirmala Sitharaman introduced the Companies (Amendment) Bill, 2020 hereinafter referred to as “Bill” in Lok Sabha on 17th March 2020. This Bill was introduced amid the opposition of various parties; they opposed and demanded that it must be referred to the Parliamentary Standing Committee as it appears to be appeasing the corporates concerning Yes Bank crisis.

The Bill proposes 72 changes resulting in amending 65 sections ranging from removing criminality from various provisions, paving way for direct overseas listing showing the Government’s support and vision for ease of business.

Minister for Corporate Affairs stated in the Parliamentary hearing that, “the Government believes in the concept of ease of doing business, decriminalizing only the compoundable offences thereby encouraging more companies into the market and reresents the commitment of government”.

BACKGROUND:

The Companies Act, 2013 hereinafter referred to as “Act” criminalized certain technical and procedural defaults. This was analyzed by the Company Law Committee (CLC). On 18th September 2019, CLC was formed by the Central Government to facilitate their efforts to “ease of doing ethical and honest business through abiding the law”. The members were representatives from the Ministry, Industry, Government chambers, and legal fraternity. CLC recommended on 14th November 2019. This led to the framing of the Bill, 2020 also known as the 2nd phase of decriminalization.

Imposing a fine is a criminal process, the Registrar of the company issues a show-cause notice for the default, which is usually responded by the company. If not, the department files a complaint against the companies for the initiation of prosecution in Magistrate Court. Thereby, the company is indebted by the Court for payment; extending to conviction by a Magistrate.

Companies can be held responsible for the offences concerning business by persons in control of its affairs; this theory per-dominatingly exists in “Doctrine of Attribution”. Iridium India Telecom vs. Motorola Incorporated &Ors addressed the question of whether the corporations are liable for offences that require Mens Rea as one of the main elements. The above-mentioned doctrine was imposed with no immunity from criminal prosecution. The Alter Ego of the companies to the persons in charge is to be imputed. The principle of the Alter Ego was discussed in Sunil Bharti Mittal vs. Central Bureau of Investigation (CBI).

COMPANIES (AMENDMENT) BILL, 2019:

Bill, 2019 was the 1st phase of the decriminalization strategy undertaken by the Government due to which many start-ups emerged in the year 2018-19. It was passed on 27th July 2019 in LokSabha, on 30th July 2019 in RajyaSabha and the President assent on 31st July 2019. Being the 1st phase it seems right to first address their changes as under:

  1. Seeks to tighten Corporate Social Responsibility (CSR) norms.
  2. Ensure stricter actions for non-compliance with the law.
  3. Companies need to transfer unpaid CSR funds to a separate account.
  4. If not at par with the law, Registrar of Companies (ROC) may remove the companies name from Registrar.
  5. Re-categorization of 16 minor offences as civil defaults.
  6. Shifting of power from National Company Law Tribunal (NCLT) to Centre.
  7. More clarity on the National Financial Reporting Authority (NFRA).

OBJECTIVES OF THE BILL:

Asher the ease of doing business:

As of date, India stands at 63rd position among 190 economies according to the latest World Bank ranking showing an improvement from 77 in 2018 to 63 in 2019.

Heading close to the top 50 marks, for an honest, successful company the provisions of the Act must have certain relaxations. This is exactly what has been proposed. Goes without saying that, these relaxations must not be used to disadvantage.

Decriminalization:

With an agenda of de-clogging the Criminal Justice System in India; simplification and reduction of the element of criminality in the Act is a measure taken to adhere to the above-mentioned objective; focusing mainly on compoundable offences. This process leads to growth in business, boost the confidence of investors and businessmen. Investigation of the alleged offences will be a departmental procedure rather than in Courtroom Proceedings.

Help reduce the burden in NCLT:

When the matters are solved in a departmental procedure rather than approaching the Court, it reduces the burden in NCLTs, NCLATs, and the Magistrate Court leading to smooth functioning and reduction in the logging of cases.

Adopting a balanced approach:

Business needs to be given due respect, they contribute to the growth of a developing economy. Criminal charges filed against them lead to a hostile work environment. Industry growth leads to employment growth; being the major drawback of India, as of June 2020 stands at 10.99% (urban 12.02% and rural 10.52%).  It facilitates a structured, efficient, and transparent corporate Governance Formula.

MAJOR AMENDMENTS:

The 72 changes proposed to re-categorize 23 offences out of 66 compoundable offences determined objectively or otherwise lack any element of fraud and not involved in the larger public interest. 23 offences will be dealt with In-house adjudication framework. Nevertheless, 7 offences are omitted.

  1. Decriminalization:

A host of offence has been proposed to amend the Act to take a pill at the exaggeration of being criminally prosecuted for imprisonment to a monetary penalty or no penalty. Imprisonment of the businessmen will affect the goodwill, trade, and the economy (GDP). Criminal prosecution on an Indian Company will intend to lower the trustworthiness of the customers leading to more imports of products from other countries which affect the growth of the economy.

Investigation of the alleged offences will be In-house adjudication framework rather than in courtroom proceedings. The main objective is to reduce criminality from 35 procedural defaults.

The proposed amendment in 3 phases:

Firstly, removing the penalty that applies to the shareholders, made in violation of the Act. For instance, where a specific penalty is not mentioned, the Bill prescribes a penalty of up to Rs.10,000; for continuing default which may extend to Rs.1000 per day.

Secondly, imprisonment is removed from 11 offences. For instance, Section 8 deals with the formulation of companies with charitable objectives who enjoy all privileges and obligations of a limited company. If the company fails to comply with the requirements laid down in the section, directors and every defaulting officer shall be punishable with imprisonment for a term not exceeding three years. However, the Bill intends to omit imprisonment with only a monetary penalty.

Thirdly, in certain offences, the monetary penalty has been proposed to reduce for 6 offences. For instance, Section 86 deals with punishment for contravention of Chapter VI Registration of Charges, under sub-section (11), Company shall pay fine extending to Rs.1,00,000/- and the officer is liable to imprisonment or fine. However, Bill intends to impose only fine on both company and officers of Rupees Five Lakh and Rupees Fifty Thousand respectively.

The 2nd phase of decriminalization is a supplementary measure by the Central Government acting in continuance to Bill, 2019, already converted 16 compoundable non-compliances from criminal to civil wrongs attracting only a monetary penalty. Bill mainly extends lesser penalties for small companies, one-person company, and producer companies.

  1. Unlisted companies must provide Interim financial statement :

Earlier unlisted companies weren’t required to submit a financial statement for the respective financial year; however, a quarterly financial statement is submitted by listed companies and a half-yearly financial statement is submitted by Debt listed companies.

The Bill requires an unlisted company to file a periodical interim financial statement to estimate their creditability, transparency into corporate affairs, and improve corporate governance at a frequency to be notified later. In addition to financial statements, delay in filing MGT14 introduced to file resolutions to ROC after passing the same in Shareholders/Boards/Creditors meeting; attracts a reduced penalty of Rs. 10,000 plus Rs. 100 per day. This has been exempted from banking companies, non-banking financial companies, and housing finance companies.

  1. Remuneration to Independent Directors (IDs) and Non-Executive Directors (NEDs):

According to Schedule V, minimum remuneration must be paid to IDs and NEDs irrespective of profit. They must be paid adequate remuneration for their efforts at par with Executive Director (ED) even in the year of the inadequacy of profit.

  1. Respite to debt listed companies:

Under Section 2 (52), securities are divided into equity and debts. When the debentures are taken for the listing, they become a listed company. The filing process contains various compliances that are very difficult to fulfill.

However, the Bill proposes to insert a proviso which enables the central government to exclude a certain class of companies based on the listing of securities in the stock exchange and consultation from the Securities and Exchange Board (SEBI); those companies need not comply with the compliances.

  1. Direct Listing Overseas:

The concept of direct overseas listing of shares was first mooted by SEBI. Earlier, companies with no equity shares listed in India will not be able to list their shares aboard. This rule affected various companies, especially startups who weren’t able to raise capital thereby affecting their trade, business, and expansion.

Bring relief to startups to tap overseas market is the Bill which proposes to enable Indian public companies for direct listing of securities in foreign permissible jurisdiction without having equity shares listed in India.

  1. Producer companies:

This has made a comeback from the Act, 1956; introduced in 2002 Part IXA as Chapter XXIA. Producer companies are those companies that engage in production, marketing, and sale of agricultural produce or from cottage industries. The Bill intends to remove these provisions and add a new chapter in the Act.

The CLC Report defines a producer company as “a body 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”.

  1. Corporate Social Responsibility (CSR):

In 2013, Minister of Corporate Affairs, Sachin Pilot stated that “CSR is a statutory provision and not a penal provision; therefore it is not mandatory but reflects a sense of responsibility to comply. If not, the company has to explain the reason for non-compliance”.

CSR law mandates spending across 12 prescribed schedules but its scope is vast. Indian companies spend more than Rs. 10,000 Crore per year in CSR. However, the lawmakers are concerned that CSR has not been taken seriously. The Bill inserts a penalty for non-compliance which is double the amount of failed transfer not exceeding Rs. 1 Crore. Officers in default are liable to pay 1/10th of failed transfer not exceeding Rs. 2 Lakhs. While omitting imprisonment for CSR violations under Sections 135(5) and 135(6), the maximum limit of penalties for companies have proposed to increase from Rs. 25 Lakhs to Rs. 1 Crore under Section 135 (7).

Every company is due bound to establish a CSR Committee, however, the Bill intends to exempt companies with less than Rs. 50 Lakh CSR obligation from constituting a committee.

In a respite to the increased amount of CSR obligation; excess spent in one year can be adjusted (carried forward) in the next succeeding year(s). A separate CSR Amendment Rules, 2020 explains all the provisions in detail.

Proposed policy: Companies with a net profit of Rs. 500 Crore or revenue of Rs. 1000 Crore or net profit Rs. 5 Crore, must shell out 2% of its net profit in the past three financial years on CSR.

CSR statistics:

CSR expenditure by companies listed in NSE grew at a healthy Compounded Annual Growth Rate (CAGR) of 17% in over five years.

In the year 2018-19, total expenditure by Indian Companies on CSR was Rs. 11,867.2 Crore. This is highest since it was made mandatory in FY15 Rs. 6, 552.5 Crore. In FY19 CSR spend was 17.2% higher than Rs. 10,128.3 Crore spent in FY18.

CONCLUSION:

It will be interesting to look at the final amended Act for further growth and corporate governance. In wake of this pandemic were business has been affected, this step towards the reduction of penalty, omission of imprisonment, direct listing in the overseas market will only contribute and aid existing business and startups.

It is crucial to note that substantive power has been transferred to the Central Government, where recently the government decided to handover the railway and electricity sector to private companies. Its connection of government calling for mergers with companies and severe decriminalization is uncanny.

Nevertheless, at a stage where India is finding alternatives to boost its economy, this Bill is a ray of hope and strength.

REFERENCES:

The Companies Act, 2013

The Companies (Amendment) Bill, 2020

The Companies (Amendment) Bill, 2019

Statement of Objects and Reasons – Bill, 2020

Iridium India Telecom vs. Motorola Incorporated &Ors(2011) 1 SCC 74

Ease of doing business rankinghttps://tradingeconomics.com/india/ease-of-doing-business

Unemployment statistics of June 2020https://unemploymentinindia.cmie.com/