Commencement of certain sections under Companies (Amendment) Act, 2019

-Phase II

by Smriti Wadehra (smriti@vinodkothari.com)

The Companies (Amendment) Bill, 2019 was introduced on 25th July, 2019 which received President’s assent on 31st July, 2019 and became the Companies (Amendment) Act, 2019. The Companies (Amendment) Act, 2019 is a combination of Companies (Amendment) Ordinance, 2019 introduced on 21st February, 2019 and 9 out of 20 proposed changes which were proposed by the Ministry on 5th November, 2018. There were two additional amendments which were not covered by the Ordinance and proposed changes.

The Companies (Amendment) Act, 2019 notified 43 sections out of which 31 sections were effective from 2nd November, 2018. Other sections were to be notified by the Ministry by way of separate commencement notification. Accordingly, the Ministry on 14th of August, 2019 further notified 10 section to be effective from the date of notification. A brief synopsis of the amendments are provided below:

Section No. of Companies (Amendment) Act, 2019 Section No. of Companies Act, 2013 Particulars Amendment Impact / Rermarks Actionable for companies
6 26 Matters to be stated in prospectus 1.    Substitution of word “registration” with “filing” in sub-section (4), (5) and (6)

 

2.    Omission of Registrar’s power to not register a prospectus for non-fulfilment of requirements of section 26

 

Seems to be a change in the terminology.
7 29 Public offer of securities to be in dematerialised form 1.    Omission of word “public” in sub-section(1)(b)

 

2.    Insertion of new clause to provide such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder

Pursuant to the amendment, all companies falling under such class of companies as may be prescribed has to mandatorily issue securities only in demat form.

 

In the absence of the Rules, this change seems to include private companies, small companies and OPC as well. However, the new clause comes with a proviso that states that the Ministry will come out with revised Rules prescribing thresholds for companies (which may include private companies) which requires issuance compulsorily in dematerialized form.

 

Further, there remain certain other grey areas which shall be clear only once the revised Rules in this regard are out. These include:

·        whether this requirement will be made applicable only for new issues of capital by companies; or

·        Will require all existing shares also to be dematerialised.

 

However, whether the same will be applicable to companies having prescribed thresholds which may include private companies, small companies, section 8 companies, OPCs etc.

 

The actionables can be determined only once the Rules are in place.

 

8 35 Civil liability for mis-statements in prospectus

 

To give effect to the amendment introduced in section 26, the term registration has been substituted with filing in this section also.

 

Mere linking of amendment in different sections.
14- clause (i), (iii) and (iv) 90(4A), (9A) and (11) Register of significant beneficial owners in a company 1.    Every company has to  take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section

 

2.    Government to come out with Rules in this regard

 

The existing provisions casted an obligation on the SBO to come and declare to the reporting company, however, the amendment indicates that nin addition to sending BEN-4 notices to the shareholders, the reporting company may also be required to go out on an investigation spree even in cases where it does not have a reason to believe about the presence of an SBO.

 

Further, the amendment also indicates that the SBO Rules shall be revised in this regard which is expected to provide the clarity on the actionables.

SBO determination is a collaborative exercise which the Company and SBO has to ensure.

 

Accordingly, as a result of this change, companies may need to send letters, notices and any other type of correspondence in addition to those cases where it was obligated to send notices to entities holding more than 10% shareholding in the Company.

 

In any event, the medium and extent of this new exercise will be clear once the MCA comes out with revised rules in this regard.

Also, considering the commencement of the said amendment has been made effective from 14th August, 2019, surely the same is to be used by the companies for identification of subsequent SBO, if any, which are identified, as the first round of identification has already been done.

 

However, what necessary steps are to be taken by the Company for identification of SBO requires clarity.

 

20 132 Constitution of National Financial Reporting Authority 1.      NFRA to perform its functions through such divisions as may be prescribed;

 

2.      Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson;

 

3.      There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions as specified in the section;

 

4.      NFRA may debar a member or firm:

I.     being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or

II.    performing any valuation as provided under section 247,

for a minimum period of 6 months or such higher period not exceeding 10 years as may be determined by the Authority

 

Amendment notifies constitution of NFRA
31 212 Investigation into affairs of Company by SFIO Pursuant to investigation report of SFIO, if fraud is reported, the Government may make an application to NCLT for disgorgement of profits/assets. Further, there will be unlimited personal liability on officers/person/entity benefitted

 

The amendment proposes disgorgement of properties of officers in default in case of corporate frauds.
33 241 Application to Tribunal for relief in cases of oppression, etc.

 

1.      Application for oppression has to be made before the Principal Bench of Tribunal by certain class of companies to be prescribed by Ministry;

 

2.      New sub-section (3) has been inserted which provides that where Central Govt is of the opinion that there exists:

a)     Fraud, misfeasance, negligence or default in management or breach of trust; or

b)     Business is not being conducted as per business principles

c)     Company is being managed by person who is likely to cause serious injury or damage to the business

d)     Business is being carried out with the intent to defraud creditors, members or any other person or prejudicial to public interest

The Government may initiate a case against such person and refer the same to the Tribunal and inquire into the case to record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

 

The law was silent of the fact that what does “matters prejudicial to public interest” with regard to section 242(2) means. The amendment list down matters where Central Government may make application against the Company to Tribunal for conducting business prejudicial to the interest of the Company.

 

The erstwhile provisions of section 398(1)(b) of the 1956 Act it was enough to establish that there was a likelihood of affairs being conducted in a prejudicial manner to the interest of Company. However, the amended provisions of Act clearly lays down situatiobs where interest of the Company can be prejudicial affected.

34 242 Powers of Tribunal

 

Pursuant to the application  made to Tribunal in sub-section 241(3), the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company

 

Tribunal on application being made by Central Government determine whether oppression/mismanagement is being conducted in the Company and record reasons whether an officer is fit and proper for managing the Company.
35 243 Consequence of termination or modification of certain agreements

 

The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of 5 years from the date of the said decision. Further shall not be entitled to any compensation for loss of office.

 

However, CG may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

Explicit prohibition on officers in default from holding similar office for a period of 5 years. –         
37 272 Petition for winding up

 

The amendment omits reference of clause (e) of section 271(1) from sub-section (3) of section 272.

 

The Registrar shall be entitled to present a petition for winding up under section 271, except on the grounds specified in clause (a) which provides that the Company must have resolved by way of a SR that the Company would be wound up by the Tribunal.

 

Reference of clause providing that Tribunal may file a petition under 272 if it is of the opinion that it is just and equitable that company should be wound up has been done away with.

 

 

38 398 Provisions relating to filing of applications, documents, inspection etc in electronic form.

 

The term “prospectus” has been omitted from clause (f) of sub-section (1) which provides for registration of prospectus by Registrar. Seems to be a change in the terminology.

 

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