[Vinod Kothari is a corporate and insolvency practitioner at Vinod Kothari & Co and can be reached at [email protected]]
The Companies (Amendment) Bill, 2019 has been placed before the Parliament on 25 July 2019. While the Bill, 2019 is largely to enact into parliamentary law the provisions already promulgated by way of Presidential Ordinance, the Bill also brings some interesting changes.
The key feature of the Bill is to replace the existing system of judicial prosecution for offences by a departmental process of imposition of penalties. As a result, while the monetary burden on companies may go up, offenders will not have to face criminal courts and the stigma attached with the same.
Some of the other highlights of the changes are as follows:
Dematerialisation of securities may now be enforced against private companies too
It is notable that amendments were made by the Companies (Amendment) Act, 2017, whereby all public unlisted companies were required to ensure that the issue and transfer of securities shall henceforth be done in dematerialised mode only. This provision alone had brought about major cleansing of the system. However, the reality of India’s corporate sector is private companies, constituting roughly 90% of the total number of incorporated companies.
The provision of section 29 is now being extended to all companies, public and private. This means that the Government may now mandate dematerialisation for shares of private companies too. Whether this requirement will be made applicable only for new issues of capital by private companies or will require all existing shares also to be dematerialised remains to be seen, but if it is the latter, the impact of this will be no lesser than “demonetisation-2” at least for the corporate sector. Evidently, all shareholders of all private companies will have to come within the system by getting their holdings dematerialised.
CSR is now mandatory, and unspent amounts will go to PM’s Funds
When the provision for corporate social responsibility (CSR) was introduced by Companies Act 2013, the then Minister for Corporate Affairs went public to say the provision will follow what is globally known as “comply or explain”; that is, companies will not be mandated to spend on CSR – the board report will only give reasons for not spending.
Notwithstanding the above, over the last few months, registry offices have sent show-cause notices to thousands of companies for not spending as required, disregarding the so-called reasons given in the board report.
Now, the rigour being added takes CSR spending to a completely different level:
– If companies are not able to spend the targeted amount, then they are required to contribute the unspent money to the Funds mentioned in Scheduled VII, for example, PM’s National Relief Fund.
– Companies may retain amounts only to the extent required for on-going projects. There will be rule-making for what the eligible on-going projects are. Even in case of such on-going projects, the amount required will be put into a special account within 30 days from the end of the financial year, from where it must be spent within the next three years and, if not spent, will once again be transferable to the Funds mentioned in Schedule VII.
– Failure to comply with the provisions makes the company liable to a fine, but very seriously, officers of the company will be liable to be imprisoned for up to three years, or pay a fine extending to rupees five lacs. Given the fact that the major focus of the Injeti Srinivas Committee Report, which the Ordinance tried to implement, was to restrict custodial punishment only to most grave offences involving public interest, this by itself is an outlier.
Unfit and improper persons not to manage companies
The concept of undesirable persons managing companies existed in sections 388B to 388E of the Companies Act, 1956. These sections were dropped by the recommendations of the JJ Irani Committee. Similar provisions are now making a comeback, by insertions in sections 241 to 243 of the Act. These insertions obviously seem a reaction to the recent spate of corporate scandals particularly in the financial sector. Provisions similar to these were recently added in the RBI Act by the Finance Bill.
The amendment in section 241 empowers the Central Government to move a matter before the National Company Law Tribunal (NCLT) against managerial personnel on several grounds. The grounds themselves are fairly broadly worded, and have substantial amplitude to allow the Central Government to substantiate its case. Included in the grounds are matters like fraud, misfeasance, persistent negligence, default in carrying out obligations and functions under the law, and breach of trust. While these are still criminal or quasi-criminal charges, the notable one is not conducting the business of the company on “sound business principles or prudent commercial practices”. Going by this, in case of every failed business model, at least in hindsight, one may allege the persons in charge of the management were unfit and improper.
Once the NCLT has passed an order against such managerial person, such person shall not hold as a director, or “any other office connected with the conduct and management of the affairs of any company”. This would mean the indicted person has to mandatorily take a gardening leave of five years!
Disgorgement of properties in case of corporate frauds
In case of corporate frauds revealed by investigation by SFIO, the Government may make an application to the NCLT for passing appropriate orders for disgorgement of profits or assets of an officer or person or entity which has obtained undue benefit.
– Vinod Kothari