by Vinod Kothari
The Companies (Amendment) Bill, 2019 has been placed before the Parliament on 25th 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, but offenders will not be having 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 effective from 10th September, 2018 effective from 2nd October, 2018, 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, as in lots of cases, shareholding records included men of straw.
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 Govt 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 dematerliaised.
CSR is now mandatory, and unspent amounts will go to PM’s Funds
When the provision for corporate social responsibility was introduced by Companies Act 2013, the-then minister Sachin Pilot went public to say, the provision will follow what is globally known as “comply or explain” (COREX). 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 are eligible on-going projects. 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 3 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 upto 3 years, or pay a fine extending to Rs 5 lacs. Given the fact that the major focus of the Injecti 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 was there 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 smacking similar were recently added in the RBI Act by the Finance Bill.
The amendment in section 241 empowers the Central Govt to move a matter before the NCLT against managerial personnel on several grounds. The grounds themselves are fairly broadly worded, and have substantial amplitude to allow the Central Govt 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, 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 5 years!
Disgorgement of properties in case of corporate frauds
In case of corporate frauds revealed by investigation by SFIO, the Govt may make an application to NCLT for passing appropriate orders for disgorgement of profits or assets of an officer or person or entity which has obtained undue benefit.