For ensuring more accountability and better enforcement, the government has proposed many amendments towards the Companies Act, 2013. The changes aim to replace previous ordinances issued in November last year and January, February this year as well as add provisions for strengthening the corporate governance norms.
The seven key proposed changes to look out for:
1. Unspent CSR Amount
At present, a company fulfilling the specific criteria should spend an amount equal to 2% of its average net profits during the immediate 3 preceding financial years on corporate social responsibility activities. The company law does not state the treatment of unspent amount on any ongoing project after the end of a fiscal year or the amount lying unspent in the CSR corpus of a corporation.
The bill introduces provisions towards ensuring that corporations expend such unspent amounts. And so, it has proposed that a corporation should:
Transfer any unspent amount in relation to any ongoing project within 30 days from the end of a fiscal year in a designated bank account called “unspent corporate social responsibility account”. This amount should be spent within a period of 3 years from such transfer.
Transfer any unspent amount that cannot be mapped towards a particular project to a specified central government fund within 6 months from the end of a fiscal year.
2. Penalties for Non-Compliance
To ensure better compliance, the government has recommended many new penalties:
Failure towards complying with the transfer of unspent CSR amount: A penalty of Rs 50,000 on the corporation which might extend up to Rs 25 lakh. For a defaulting officer, a penalty ranging between Rs 50,000 to Rs 5 lakh or imprisonment is proposed.
Failure towards filing an annual return: Company and every officer responsible would be liable to pay a fine of Rs 50,000 and additional penalties for continuing failure.
Penalty for fraud: Any individual found guilty of a fraud which doesn’t involve public interest and the amount is below Rs 10 lakh or 1% of the turnover of the company, such individual shall be liable for a maximum penalty of Rs 50 lakh. At present, the limit is Rs 20 lakh.
3. Director Disqualification
The bill recommended adding an additional ground for disqualifying an individual as a director. According to the law, an individual cannot be a director in more than 20 companies or 10 public companies. The recommended change states that any individual who breaches these limits shall be disqualified from acting as a director.
4. Significant Beneficial Owner
The government had introduced the requirement towards identifying the significant beneficial owner in a corporation to curb the menace of shell companies as well as trace true ownership. Section 90 of the Companies Act, 2013 says that every person acting alone or together who is a significant beneficial owner should disclose this fact.
The bill proposed to also put the onus of compliance on companies with this provision. According to the bill, a corporation should take necessary steps to identify an SBO and the individual is required to make the declarations stated under the Companies Act.
5. Verification of Registered Office
Another major change relates to the verification of the registered office by the Registrar of Companies. According to company law, every new company should have a registered office within 30 days of its incorporation. Likewise, every existing company should have a registered office throughout its existence. In the direction of curbing the menace of shell companies, the amendment gives the following powers towards the registrar:
• Carrying out physical verification of the registered office of the corporation if the registrar has reasonable cause to believe that a corporation is not carrying on any business.
• Initiate an action for removing a corporation’s name from the register if a company fails to have a registered office.
6. Oppression and Mismanagement
One more change relates to the cases concerning oppression and mismanagement in companies. The recommended change considerably increases the scopes of against whom could such a case be brought against by the central government.
It aims to extend it to any individual who:
• Is concerned regarding the conduct and management of the affairs of the corporation and is guilty of fraud, misfeasance or persistent negligence, or there is a default in carrying out his functions or for violation of trust.
• Is in-charge of management of the corporation and fails towards carrying out the functions along with sound business principles or prudent commercial practices.
• Conducts the business of the corporation in a manner which could cause damage or injury to the corporation or the industry or conducts affairs of the corporation to defraud the creditors, or members of the corporation or any other individual.
Another major proposed change for oppression and mismanagement cases relates to modifying the NCLT’s jurisdiction. It has been proposed that the central government could specify that cases in relation to oppression and mismanagement at the specified class of corporations could be filed only with the principal bench of the NCLT in Delhi. At present, any bench of the NCLT could deal with an oppression and mismanagement application.
7. Powers of NFRA
The government has recommended widening the powers of the National Financial Reporting Authority to debar an auditor or a corporation. At present, the NFRA could debar a member of the Institute of Chartered Accountants of India or a corporation for a period ranging between 6 months to 10 years.
According to the recommended amendment, the NFRA could now ban a member of ICAI or a corporation from:
• Carrying out as a statutory or internal auditor.
• Undertaking an audit of the financial statement.
• Performing audit of the functions and activities of a corporation or body corporate.
• Performing any valuation work under the Companies Act.
Besides these amendments, the bill has also recommended increasing the powers of the regional director towards compounding offenses under the Companies Act. Any offence under company law which involves a fine of up to Rs 25 lakh could be compounded through the regional director once the bill is passed.
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