Lok Sabha passes Companies Amendment Bill 2019

Finance Minister Nirmala Sitharaman stated that the government has de-registered 4 lakh shell companies as the Lok Sabha has approved a bill looking for to tighten the CSR norms and guaranteeing stricter action for non- compliance of the company law principles.

For amending the Companies Amendment Bill 2019, the minister has stated that corporations not spending the mandatory 2% profit on Corporate Social Responsibility (CSR) activities for a total period of 4 years shall be required to deposit the sum in a special account.

The amendments in the Companies Act were intended at improving the simplicity of carrying out business and also decreasing the compliance burden on the corporations, especially the smaller ones.

Responding towards the fears of members on shell companies, Finance minister stated that the word "shell companies" has not been well-defined in the rule book, but it is inaccurately referred to inactive corporations or those which don’t maintain a registered office.

Finance Minister Nirmala Sitharaman stated that 4 lakh corporations have been identified and de-registered, adding non-maintenance of registered office shall be a ground for de-registration of corporations.
A major change in the Bill relates to CSR spending, in which corporations shall have to compulsorily keep unspent money into a special account.

Under the Act, corporations earning a profit of above Rs 5 crore, turnover of Rs 100 crore or net worth of above Rs 500 crore must shell out at least 2% of their 3 years annual average net profit towards CSR actions.

The corporations would have 1 year to firm up the CSR proposal as well as another 3 years to spend funds.

If the money remains unspent for one plus 3 years, the money would have to be moved towards an escrow account, adding it can even be the Prime Minister's, Relief Fund.

The bill authorizes the Registrar of Companies (ROC) towards initiating action for removal of the name of the corporation from Register of companies if it is not carrying on any commerce or operation as per the company law.

Amongst other things, the bill also furnishes for re-categorization of 16 minor wrongdoings as purely civil defaults, transferring of functions relating to dealing with applications for change of fiscal year to Central government as well as shifting of powers for conversion from public towards private companies from NCLT to the central government, and more clearness relating to certain powers of the National Financial Report.

The major features of the amendment of the Companies (Amendment) Bill 2019

The major features of the amendment are:

Allowing subsidiaries of foreign corporations to follow different fiscal year for accounting.

The Bill proposes towards adding a provision to Section 2 to allow companies which are subsidiaries or associates of foreign corporations which follow a different fiscal year for accounting out of India to follow any period as its fiscal year.

Measures towards controlling 'shell companies'

The Bill proposes for controlling 'shell companies'. Newly suggested Section 10A makes it compulsory for new companies towards filing a declaration with the concerned Registrar within 180 days of the date of incorporation that each subscriber towards the memorandum has paid the value of the shares agreed to be taken through him on the date of making of such declaration.

Non-filing of such a declaration could be a reason for the removal of the corporation from the register of companies based on non-commencement of business.

Sub-section (9) proposed towards being added to Section 12 of the principal Act allows the Registrar to cause a physical verification of the registered office of the corporation if the Registrar has rational cause to believe that the corporation is not carrying on any commerce or operations.

Clause 36 of the Bill looks for to amend sub-section 1 of section 248 of the Act to insert new clauses (d) and (e) towards providing that in case the subscribers to the memorandum have not paid the subscription which they had commenced to pay and declaration under Section 10A was not been filed which they had undertaken to pay as well as declaration under Section 10A was not been filed or where the corporation is not carrying on any commerce or operation as revealed after the physical verification, the Registrar would send notice to such corporations and its directors informing them of his intent to remove the name of the corporation from the register of companies

Change of punishment of fine
 

16 sections of the Act are proposed to amend to modify the punishment as provided in the said sections from fine to financial penalties to diminish the burden upon the Special Courts.

Provisions for unspent CSR amount 
 

Amendments are suggested to Section 135 to carry forward the unspent corporate social responsibility sum, towards a special account to be spent within 3 financial years and transfer afterward towards the Fund specified in Schedule VII, for example, PM's National Relief Fund.

Expelling of erring auditors
 

 The Bill furnishes for the penalty for debarment from appointment as an auditor or internal auditor of a corporation, or performing a corporation's valuation, for a period between 6 months to 10 years for proven misconduct.

Provisions towards dealing with individuals 'unfit and improper' to manage corporations
 

The amendment proposed towards Section 241 allows the Central Government to move a matter before the NCLT against managerial employees on numerous grounds for instance:

• any individual concerned in the conduct as well as management of the affairs of a corporation is or was in connection therewith guilty of deception, misfeasance, persistent negligence or default in implementation of his responsibilities as well as functions under the law or of breach of trust;

• the business of a corporation is not or has not been conducted and managed through such individual in accordance with sound business principles or practical commercial practices;

• A corporation is or was conducted and managed through such individual in a manner which is likely to cause, or have already caused, serious harm or damage towards the interest of the trade, industry or commerce to which such corporation pertains; or

• The business of a corporation is or has been conducted and managed through such individual with the intention to defraud its creditors, associates or any other individual or otherwise for a deceitful or unlawful purpose or in a manner harmful towards public interest

In those cases, the Central Government might refer the matter and request to the Tribunal to investigate into the case and record a verdict regarding whether the individual is a fit and proper individual to hold the office of director or any other office associated with the conduct and management of any corporation.
 

Clause 35 of the Bill look for to amend section 243 of the Act to furnish that the individual who is not a fit and proper individual pursuant towards section 242 would not hold the office of a director or any other office associated with the conduct and management of the affairs of any corporation for a period of 5 years from the date of the relevant verdict of the Tribunal. It also looks for to provide that the Central Government might, with the leave of the Tribunal, permit such individual to hold any such office before the expiry of the specified period of 5 years. The clause also looks to offer that the individual so removed from the office of a director or any other office associated with the conduct as well as management of the affairs of the corporation would not be entitled to, or be paid, any payment for the loss or termination of office.

Expanding the power towards compounding offenses 
 

The pecuniary restrictions of Regional Director (“RD”) towards compounding offenses under section 441 of the Act are proposed to be increased. The threshold is suggested to be increased to a fine up to R. 25 lakhs
 

Disqualification of director 
 

A new clause was introduced under the Section 164 to provide that violation of Section 165(1) would be a ground for disqualification of a director, if the director violates the limits of maximum directorship permitted thereunder.

Author:

eStartIndia Team