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December 10, 2018

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Drivers for the Companies Amendment Ordinance, 2018


- Dr. Manoj Kumar, Founder & Managing Partner [ Hammurabi & Solomon ]

drmanoj-kumar

There is a need to replace the Ordinance with an amendment of the Act through a Bill of the Parliament, failing which, uncertainties of consequential liabilities upon the Ordinance lapsing may limit its compliance positive aspects...

The Companies Amendment Ordinance, 2018 (“Ordinance”) promulgated and effective from 2nd November 2018 has made some very significant amendments to the provisions of the Companies Act, 2013 (“Act”). Before reviewing the changes, it is essential to access the need and drivers for these changes.

The Ordinance has been promulgated following deliberations and inputs from stakeholders and report of the offences review committee set up for the purpose by the Government of India. Some of the important pain-points of the companies and stakeholders in relation to the Act include:

  • Over-criminalization of non-compliances and offenses,
  • Inadequacy of compensation for independent directors compared to the increasingly deeper engagements expected from them under the Act,
  • Over-burdened National Company Law Tribunal (“NCLT”) saddled with even routine/administrative responsibilities in relation to various approvals,
  • Need for reforms in the corporate governance regime to help give effect to provisions of the Act, etc.

This primer seeks to flag some key changes brought about by the Ordinance, as follows:

1. Change of ‘financial year’ by Indian companies having holding/subsidiary/associate companies overseas would now need to be approved by the Central Government instead of the NCLT.

2. Alteration of the Articles of Association having the effect of converting a public company into private now needs to be approved by an order to the Central Government instead of the NCLT

3. A declaration and verification by a director holding shares for the payment of the value of shares agreed to be taken by every subscriber to the memorandum is again required to be filed with the registrar before the commencement of any business, failing which would attract a penalty of fifty thousand rupees for every company and one thousand rupees for every officer for each day during which the default continues. Deletion of erstwhile Section 11 of the Act in 2015 has been revisited.

4. If the Registrar of Companies (“Registrar”) has “reasonable cause to believe” that the company is not carrying on any business or operation, he (the registrar) may cause “physical verification” of the registered office of the company and also initiate action for the removal of name of the company from the register upon a default or failure to ensure the registered office to be capable of acknowledging and receiving notices and communications.

5. The penalty for issue of shares at a discount would be an amount equivalent to that raised (not the earlier position of minimum one lakh rupees) apart from imprisonment as prescribed.

6. The companies and officers would be treated uniformly for failing to comply with Section 92 (Annual Returns) - a penalty of `50,000/- and in case of continuing failure `100/- per day of continuance up to five lakh rupees, a change from the earlier provision providing for harsher and differential treatment to officers.

7. The creation of charge period reduced to 60 days instead of 300-day span provided under Section 77 of the Act, on the payment of the ad valorem fees. The Ordinance also prescribes that any contravention of Section 77, by wilfully furnishing false or incorrect information or knowingly suppressing material information, would specifically attract penalties under Section 447 of the Companies Act, 2013 (Punishment for Fraud).

8. The Ordinance brings back the power by the Registrar of Companies for compulsory removal of name of a company on two grounds viz., not filed declaration and the e-form INC-22.

The penal and criminal provisions as set out in the Act in 2013 had then been found necessary following prolonged stakeholder interactions and with a need to bring transparency and accountability in companies. Why then a need to review now?

  • A case of having gone for over-criminalization,
  • A case of companies (particularly Small & Medium) not being able to effectively meet challenges relating to compliance,
  • Because of a need not to treat minor and major offenses at the same scale, or
  • Because of inability of the corporate administration eco-system to keep pace and cope with such a wide portfolio of corporate offenses in the criminal judicial administration.

Rationalisation of fines/penalties and unburdening NCLTs is welcome. Continuation of sub-section (9) of Section 149 despite deletion of sub-section 7 of Section 197 is still adverse to deeper engagement by Independent Directs on Boards

Additionally, the issue of compensation for independent directors has always been trailing behind, which has kept good talent away from taking up responsibilities as independent directors. Restrictions placed on offer of stock options to independent directors have always put companies without deep pockets to offer high sitting fees to independent directors to attract talent. The removal of restrictions on offer of stock options to independent directors is well conceived and should go a long way in enabling better talent to take up roles of independent directors and thus a more effective functioning of Boards.

With the number of cases before various benches of NCLT likely to touch 10,000 soon, the NCLT has also started facing similar challenges as were being faced by its predecessors at High Courts, Company Law Board, and BIFR: The pile up of filings of a variety of cases ranging from Insolvency, Mismanagement, Mergers & Amalgamations / Restructuring, Liquidations, and a range of routine applications for approvals, etc. The challenges of scalability of capacities of NCLT to cater to higher volumes of cases are far from over and thus the need to divert some of the portfolio to the Central Government, though challenges would remain there as well in the form of writ courts having an oversight jurisdiction of decisions of the Central Government which could impact the implementation of some provisions in the same manner as was felt in the pre-2013 period.

Further reforms in the corporate governance space, such as (i) an oversight over companies intending to commence business or raise borrowings, (ii) inspection of registered offices of suspected bogus companies and their strikingoff, (iii) disqualification of directors on more than 20 boards, etc. are expected to aid the ongoing steps in relation to curb fly-by-night companies.

The Ordinance seeks rationalization of fines & penalties for various offences/non-compliances under the Act and is likely to give a boost to building a robust compliance regime which was one of the key areas of reforms in the Act. A fine is an amount imposed by a court on a person who is convicted of a criminal offense, whereas a penalty is imposed by the concerned regulatory authority on a person who has failed to comply with the specific provisions of an Act, as applicable.

Additionally, shifting of cases relating to various approvals, etc. from NCLT to the Central Government is expected to reduce the mounting pressures on pendencies before the NCLTs and thus help to fast track the progress of other cases before the NCLT and also fast track the approvals by the Central Government going forward. An estimated 90 percent of cases would move from NCLTs to Regional Directors pursuant to the Ordinance. The non-compoundable offenses, however, remain unaffected considering the seriousness of such offenses.

There, however, is a need to replace the Ordinance with an amendment of the Act through a Bill of the Parliament, failing which, uncertainties of consequential liabilities upon the Ordinance lapsing may limit the compliance positive aspects of the Ordinance.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

 

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