Companies (Amendment) Act, 2020

The Companies (Amendment) Act, 2020 has introduced several measures to improve the ease of doing business and de-criminalize certain offences. The Companies (Amendment) Act, 2020, which amends the Companies Act, 2013, has been published in the Official Gazette on September 28, 2020, and will come into effect from such date(s) as may be notified by the Central Government. Some of the key amendments are:

De-Criminalisation

The Companies (Amendment) Act, 2020 (‘Amendment Act’) does away with imprisonment as a consequence of violation of certain provisions of the Companies Act, 2013 (‘Companies Act’). It also reduces or modifies the fines/penalties for certain offences under the Companies Act, 2013. Some of the key changes in this regard are as follows:

i) Reduction of Fine for Failure to File Annual Return: The Amendment Act has now reduced the one time penalty payable by companies in case of contravention of failure to file annual return to INR 10,000 from INR 50,000 (approx. USD 150 from USD 700), and in case of continuing offences, a fine of INR 100 for every day subject to a reduced limit of INR 200,000 from INR 500,000 (approx. USD 7,000 from USD 2,700) for the company, and INR 50,000 (approx. USD 700) for officers in default; and

ii) Removal of Imprisonment for Directors and/or Officers of Default for certain Contraventions: Imprisonment has been removed as a punishment for contravention of the provisions in relation to (i) buy-back of securities; (ii) financial statements and board’s report; (iii) knowingly functioning as a director despite the seat being vacated due to disqualification; (iv) constitution of audit committee, nomination and remuneration committee and stakeholders relationship committee; and (v) disclosure of interest by director and participation in relation to matters in which he is interested.

In addition, the Amendment Act extends provisions of the Companies Act relating to reduced fines for certain offences presently applicable to one-person companies or small companies to producer companies and start-up companies as well.

‘Ease of Living’ for Companies and other changes

The Amendment Act seeks to promote ‘ease of living’ for companies and certain other changes by way of the following key amendments:

i) Remuneration of Independent or Non-Executive Directors in case of    No/Inadequate Profits: The Amendment Act aligns the provisions applicable to independent and non-executive directors with those applicable to executive directors, such that when a company has inadequate profits independent/non-executive directors too are entitled to receive remuneration only up to the extent permissible under the Companies Act.

ii) Scope of Listed Companies: The Companies Act earlier provided that a company with ‘any of its securities listed on any recognized stock exchange’ was considered to be a listed company. The Amendment Act provides that the Central Government, in consultation with the Securities and Exchange Board of India, can exclude certain classes of securities from this requirement.

iii) Corporate Social Responsibility Spending: The Amendment Act provides that companies spending in excess of prescribed corporate social responsibility (‘CSR’) amounts can set off the excess in succeeding financial years (limit on how many years this set-off may be availed of will be prescribed by rules). Further, an entity which is not required to spend more than INR 5,000,000 (approx. USD 70,000) towards its CSR obligations in a financial year, is not required to constitute a CSR committee, and instead the board of directors of the entity may discharge such role.

iv) Foreign Listings: The Amendment Act empowers the Central Government to permit some classes of public companies (which are yet to be prescribed) to list certain classes of securities in foreign jurisdictions without requiring listing in India, and such companies may also be exempted from complying with certain provisions of the Companies Act.

v) Fundraising Timelines: The Amendment Act introduces flexibility to reduce a rights issue offer period to less than 15 days (as earlier prescribed under the Companies Act), allowing quicker access to funds.

vi) Beneficial Shareholding: The Amendment Act provides the Central Government the power to exempt a class or classes of persons in public interest, from filing declarations if beneficial ownership differs from legal ownership.

vii) Preparation of Periodical Financial Results: The Central Government has been given the power to require certain classes of unlisted companies to prepare periodical financial results (in addition to annual results currently prescribed by the Companies Act). Such periodical financial results would have to be approved by the board of directors and be audited (or subject to a limited review) by the statutory auditors.

Impact

These amendments are a welcome step towards providing ease of doing business for Indian corporates. De-criminalisation of procedural/technical offences, which can be determined objectively and which otherwise lack any element of fraud or do not affect the larger public interest is also a positive move. It will help companies avoid getting tarnished by criminal sanctions for minor, technical or inadvertent lapses. While the above measures are encouraging for ease of business, the extent of efficacy of some of the amendments such as direct listing overseas will be determined by the nature and basis for the exemptions granted by the Central Government.

Date: October 8, 2020