First phase of commencement of Companies (Amendment) Act, 2020

-Commencement notification dated 21st December, 2020

Smriti Wadehra, Manager and Henil Shah, Assistant Manger

corplaw@vinodkothari.com

The Ministry of Corporate Affairs vide its commencement Notification dated 21st December, 2020 has notified 45 sections of the Companies (Amendment) Act, 2020 [1]which recently received the President’s assent on 28th September, 2020[2]. The sections notified by the Ministry majorly relate to re-categorization of criminal offences into civil wrongs which is in line with the Government of India’s policy to decriminalise non-compliances that are technical and procedural nature thereby promoting ease of doing business.

A brief synopsis of the amendments is detailed below:

Section No. of CAA, 2020 Section No. of CA, 2013 Pertains to Existing Provisions Amended Provisions
Shift from fine to penalty
9 56(6) Any default in transfer and transmission of Securities Fine on Company: Min Rs. 25,000 Max Rs. 5 Lakhs and

Fine on Officer of the company in default: Min- Rs.10,000 Max – Rs. 1 Lakhs.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
16 86(1) Contravention of provisions relating to registration of charges Fine on Company: Min- Rs. 1 Lakh Max- Rs. 10 Lakhs

Fine on officer in default: Imprisonment for a term which may extend to 6 months or with fine Min- Rs. 25,000 Max- Rs. 1 Lakh, or with both.

Company shall be liable to a penalty of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
17 88(5) Failure to maintain Register of Members or debenture holders etc.

 

Fine on Company: Min- Rs. 50,000 Max- Rs. 3 Lakhs and where the failure is a continuing one, with a further fine of Rs. 1000 for every day,

 

Every officer of the company who is in default: Fine of min- Rs. 50,000 Max-Rs. 3 Lakhs where the failure is a continuing one, with a further fine of Rs. 1000 for every day.

 

Company shall be liable to a penalty of Rs. 3 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
18 89(5) Failure to submit declaration in respect of beneficial Interest in any share

 

Person shall be punishable with fine which may extend to Rs. 50,000 and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

Person shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with a further penalty of Rs. 200 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs.
18 89(6) Declaration in Respect of Beneficial Interest in any Share

 

The company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 500 but which may extend to Rs. 1000 and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 1000 for each day during which such failure continues, subject to a maximum of Rs. 5 Lakhs in the case of a company and Rs. 2 Lakhs in case of an officer who is in default.
19 90(10) Failure to declare significant beneficial ownership in the Company Person shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 10 Lakhs or with both and where the failure is a continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the failure continues.

 

Person shall be liable to penalty of Rs. 50,000 and in case of continuing failure, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.
19 90(11) Failure to maintain register of significant beneficial owners in a company

 

Company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 10 Lakhs but which may extend to Rs. 50 Lakhs and where the failure is a continuing one, with a further fine which may extend to Ra. 1000 for every day after the first during which the failure continues. Company shall be liable to a penalty of Rs. 1 Lakhs and in case of continuing failure, with a further penalty of Rs. 500 for each day, after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure, with a further penalty of Rs. 200 for each day, after the first during which such failure continues, subject to a maximum of Rs.1 Lakh

 

20 92(6) Certification of Annual Return not in conformity with the section

 

Company secretary in practice shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs.

 

Company secretary in practice shall be liable to a penalty of Rs. 2 Lakhs.
21 105(5) Proxies If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who knowingly issues the invitations as aforesaid or wilfully authorises or permits their issue

shall be punishable with fine which may extend to Rs. 1 Lakh:

Provided that an officer shall not be punishable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy.

 

If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company’s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every officer of the company who issues the invitation as aforesaid or authorises or permits their issue, shall be liable to a penalty of Rs. 50,000.

Provided that an officer shall not be liable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available on request in writing to every member entitled to vote at the meeting by proxy

30 143(15) Failure to report fraud under the section Any auditor, cost accountant or company secretary in practice shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 25 Lakhs. Any auditor, cost accountant, or company secretary shall,

(a)    in case of a listed company, be liable to a penalty of Rs. 5 Lakhs; and

(b)    in case of any other company, be liable to a penalty of Rs. 1 Lakh

35 172 Non-compliance of any provisions of chapter relating to appointment and qualification of directors Company and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs. Company and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000, and in case of continuing failure, with a further penalty of Rs. 500 for each day during which such failure continues, subject to a maximum of Rs. 3 Lakhs in case of a company

 

36 178(8) Non-compliance of provisions relating to section 177 and 178 of the Act. Company shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

Company shall be liable to a penalty of Rs. 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 1 Lakh.

 

37 184(4) Failure of disclosure of Interest by Director

 

Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which may extend to Rs. 1 Lakh, or with both. Director shall be liable to a penalty of Rs. 1 Lakh.

 

38 187(4) Failure to hold investments by the company in its own name

 

The company shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 25 Lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

The company shall be liable to a penalty of Rs 5 Lakhs and every officer of the company who is in default shall be liable to a penalty of Rs. 50,000.
39 188(5) Related Party Transactions

 

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall-

(i) in case of listed company, be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs, or with both; and

(ii) In case of any other company, be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs.

 

Any director or any other employee of a company, who had entered into or authorised the contract or arrangement in violation of the provisions of this section shall-

(i)            in case of listed company, be liable to a penalty Rs. 25 Lakhs; and

(ii)            In case of any other company, be liable to a penalty of Rs. 5 Lakhs.

41 204(4) Contravention of provisions relating to secretarial Audit for bigger companies

 

The company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs. The company, every officer of the company or the company secretary in practice, who is in default, shall be liable to a penalty of Rs. 2 Lakhs.
42 232(8) Merger and Amalgamation of Companies

 

If a transferor company or a transferee company contravenes the provisions of the section, the transferor company or the transferee company, as the case may be, shall be punishable with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 25 Lakhs and every officer of such transferor or transferee company who is in default, shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

If a company fails to file the certified true copy of the order with the Registrar for registration within 30 days of the receipt of order, the company and every officer of the company who is in default shall be liable to a penalty of Rs. 20,000, and where the failure is a continuing one, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 3 Lakhs.
57 405 Failure to provide any information or statistic to CG Company shall be punishable with fine which may extend to Rs. 25,000 and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25, 000 but which may extend to 3 lakh rupees, or with both.

 

The company and every officer of the company who is in default shall be liable to a penalty of Rs. 25,000 and in case of continuing failure, with a further penalty of Rs. 1000 for each day after the first during which such failure continues, subject to a maximum of Rs. 3 lakh rupees.
63 450 Punishment where no specific penalty or punishment is provided Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to Rs. 10,000, and where the contravention is continuing one, with a further fine which may extend to Rs. 1000 for every day after the first during which the contravention continues. Company and every officer of the company who is in default or such other person shall be liable to a penalty of Rs. 10,000 and in case of continuing contravention, with a further penalty of Rs. 1000 foreach day after the first during which the contravention continues, subject to a maximum of Rs. 2 lakhs in case of a company and Rs. 50,000 in case of an officer who is in default or any other person.

 

Omission of imprisonment provisions
3 8(11) Failure in fulfilment in requirement relating to formation of companies with Charitable Objects, etc.

 

Directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 25000 which may extend to Rs. 25 lakhs, or with both.

 

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

 

Directors and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 25000 which may extend to Rs. 25 lakhs, or with both.

 

Provided that when it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under section 447.

 

6 26(9) Issue of prospectus in contravention of provisions of section 26 of the Act Every person who is knowingly a party to the issue of such prospectus:

shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs or with both.

Every person who is knowingly a party to the issue of such prospectus:

shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs. 50,000  but which may extend to Rs. 3 Lakhs or with both.

 

7 40(5) Default in complying with provisions relating to securities being dealt with in Stock Exchanges

 

Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable :

With imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 Lakhs, or with both.

 

14 68(11) Non-compliance of buyback provisions Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable:

With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

 

24 128(6) Books of Account, etc., to be kept by Company

 

If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board with the duty of maintenance of books of accounts of the company and contravenes such provisions, such persons of the company shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs or with both.

 

If the managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company charged by the Board duty of maintenance of books of accounts of the company and contravenes such provisions, such persons of the company shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs or with both.

 

26 134(8) Contravention of provision relating to the Financial Statements, Board’s Report, etc of the Company Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakhs, or with both.

 

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years shall be liable to a penalty of Rs. 50,000.

 

31 147(1) Punishment for contravention of provision relating to appointment of auditors and audit of the Company Every officer of the company who is in default shall be punishable:

with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1 Lakh, or with both.

 

Every officer of the company who is in default shall be punishable:

with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 10,000 but which may extend to Rs. 1 Lakh, or with both.

 

34 167(2) Continuation of office by director after knowing his disqualifications Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs, or with both

 

Director shall be punishable with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs, or with both

 

43 242(8) Failure to comply with alteration in the charter documents by the Tribunal Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh, or with both.

 

44 243(2) Person who knowingly acts as MD or other director in the company while entering into agreements Such person shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 5 Lakhs, or with both.

 

Such person shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 5 Lakhs, or with both.

 

49 347(4) Disposal of Books and Papers of Company.

 

If any person acts in contravention of any rule framed or an order made under sub-section (3), he shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 50,000, or with both.

 

If any person acts in contravention of any rule framed or an order made under sub-section (3), he shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 50,000, or with both.

 

54 392 Punishment for contravention of provisions of Chapter XXII relating to companies incorporated outside India The foreign company shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 3 lakh and in the case of a continuing offence, with an additional fine which may extend to Rs. 50, 000 for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakhs, or with both The foreign company shall be punishable with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 3 lakhs and in the case of a continuing offence, with an additional fine which may extend to Rs. 50, 000 for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakhs, or with both
61 441 Compounding of certain offence Any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4) shall be punishable with imprisonment for a term which may extend to 6 months, or with fine not exceeding Rs. 1 lakh, or with both If any officer or other employee of the company who fails to comply with any order made by the Tribunal or the Regional Director or any officer authorised by the Central Government under sub-section (4), the maximum amount of fine for the offence proposed to be compounded under this section shall be twice the amount provided in the corresponding section in which punishment for such offence is provided.

 

Amendment in penal provisions
20 92(5) Failure to file Annual Return within the specified time Company and its every officer who is in default shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 5 Lakhs. Company and its every officer who is in default shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 2 Lakhs in case of a company and Rs. 50,000 in case of an officer who is in default.
22 117(2) Failure to file resolution or agreement with the Registrar Penalty on Company: Rs. 1 Lakh and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 25 Lakhs.

Every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 50,000 and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs.

Penalty on Company: Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.

Every officer of the company who is in default including liquidator of the company, if any, shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.

28 137(3) Failure to file a copy of Financial Statement to be Filed with Registrar

 

Company shall be liable to a penalty of Rs. 1000 for every day during which the failure continues but which shall not be more than Rs. 10 Lakhs, and the MD and the CFO of the company, if any, and, in the absence, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 1 Lakh and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs. Company shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with a further penalty of Rs. 100 for each day during which such failure continues, subject to a maximum of Rs. 2 Lakhs, and the MD and the CFO of the company, if any, and, in the absence any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 10,000 and in case of continuing failure, with further penalty of Rs. 100 for each day after the first during which such failure continues, subject to a maximum of Rs. 50,000.
29 140(3) Failure to file resignation with the company and Registrar The auditor shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 5 Lakhs. The auditor shall be liable to a penalty of Rs. 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of Rs. 500 for each day after the first during which such failure continues, subject to a maximum of Rs. 2 Lakhs.
33 165(6) Failure to comply with restriction on maximum number of Directorships

 

Person shall be liable to a penalty of Rs. 5000 for each day after the first during which such contravention continues. Person shall be liable to a penalty of Rs. 2000 for each day after the first during which such violation continues, subject to a maximum of Rs. 2 Lakhs.
50 348(6) Information as to pending liquidations If a Company Liquidator contravenes the provisions of this section, the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the failure continues.

 

Where a Company Liquidator, who is an insolvency professional registered under the Insolvency and Bankruptcy Code, 2016 is in default in complying with the provisions of this section, then such default shall be deemed to be a contravention of the provisions of the said Code, and the rules and regulations made thereunder for the purposes of proceedings under Chapter VI of Part IV of that Code.

 

Omission of penal provisions
8 48(5) Failure to protect rights of the members during variation of Shareholders’ Rights Fine on Company: Which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs and

Every officer of the company who is in default shall be punishable: with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakhs, or with both.

Omitted
10 59(5) Default in complying with order of Tribunal w.r.t. rectification of register of members Fine on Company: Which shall not be less than Rs. 1 Lakh but which may extend to Rs. 5 Lakhs and

Every officer of the company who is in default shall be punishable: With imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 3 Lakhs, or with both.

Omitted
13 66(11) Failure to publish the order of reduction of capital of the Company Fine on Company: not be less than Rs. 5 Lakhs but which may extend to Rs. 25 Lakhs

 

Omitted
15 71(11) Failure to comply with order of Tribunal for discharge of assets of the Company Every officer of the company who is in default shall be punishable: With imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 2 Lakhs but which may extend to Rs. 5 Lakhs, or with both. Omitted
46 284(2) Promoters, directors etc. to cooperate with Company Liquidator Where any person, without reasonable cause, fails to discharge his obligations under sub-section (1), he shall be punishable with imprisonment which may extend to six months or with fine which may extend to fifty thousand rupees, or with both

 

If any person required to assist or cooperate with the Company Liquidator under sub-section (1) does not assist or cooperate, the Company Liquidator may make an application to the Tribunal for necessary directions.

 

On receiving an application under sub-section (2), the Tribunal shall, by an order, direct the person required to assist or cooperate with the Company Liquidator to comply with the instructions of the Company Liquidator and to cooperate with him in discharging his functions and duties

47 302(4) Dissolution of company by Tribunal If the Company Liquidator makes a default in forwarding a copy of the order within the period specified in sub-section (3), the Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues.

 

Omitted
48 342(6) Prosecution of Delinquent Officers and Members of Company

 

If a person fails or neglects to give assistance required by sub-section (5), he shall be liable to pay fine which shall not be less than Rs. 25,000 but which may extend to Rs. 1 Lakh.

 

 
50 348(7) Information as to Pending Liquidations.

 

If a Company Liquidator makes wilful default in causing the statement referred to in sub-section (1) audited by a person who is not qualified to act as an auditor of the company, the Company Liquidator shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 1 Lakh, or with both. Omitted
Amendments relating to dissolution of company
47 302(3) Dissolution of company by tribunal A copy of the order shall, within thirty days from the date thereof, be forwarded by the Company Liquidator to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company

 

The Tribunal shall, within a period of thirty days from the date of the order—

(a) forward a copy of the order to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company; and

(b) direct the Company Liquidator to forward a copy of the order to the Registrar who shall record in the register relating to the company a minute of the dissolution of the company.

 

51 356 Powers of Tribunal to declare dissolution of company void It shall be the duty of the Company Liquidator or the person on whose application the order was made, within thirty days after the making of the order or such further time as the Tribunal may allow, to file a certified copy of the order with the Registrar who shall register the same, and if the Company Liquidator or the person fails so to do, the Company Liquidator or the person shall be punishable with fine which may extend to ten thousand rupees for every day during which the default continues.

 

The Tribunal shall—

(a) forward a copy of the order, within thirty days from the date thereof, to the Registrar who shall record the same; and (b) direct the Company Liquidator or the person on whose application the order was made, to file a certified copy of the order, within thirty days from the date thereof or such further period as allowed by the Tribunal, with the Registrar who shall record the same

 

[1] https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf

[2] http://egazette.nic.in/WriteReadData/2020/223873.pdf

 

Our other write ups covering Companies (Amendment) Act, 2020:

  1. Highlights of Companies (Amendment) Bill, 2020: http://vinodkothari.com/2020/03/highlights-of-the-companies-amendment-bill-2020/
  2. Companies (Amendment) Act, 2020 PowerPoint presentation: http://vinodkothari.com/2020/09/companies-amendment-act-2020/
  3. Enforcement Status of Companies (Amendment) Act, 2020:http://vinodkothari.com/2020/12/enforcement-status-of-companies-amendment-act-2020/

Enforcement Status of Companies (Amendment) Act, 2020

 

Important Links:

  1. The Companies (Amendment) Act, 2020 : https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf
  2. MCA notification dated December 21, 2020: https://www.mca.gov.in/Ministry/pdf/AmendmentAct_29092020.pdf
  3. Our other write ups covering Companies (Amendment) Act, 2020:
    1. Highlights of Companies (Amendment) Bill, 2020: http://vinodkothari.com/2020/03/highlights-of-the-companies-amendment-bill-2020/
    2. Companies (Amendment) Act, 2020 PowerPoint presentation: http://vinodkothari.com/2020/09/companies-amendment-act-2020/

MCA issues rules to squeeze out minority shareholding held in dematerialized form

Shaifali Sharma | Vinod Kothari and Company

corplaw@vinodkothari.com

 

Understanding minority squeeze out

‘Minority squeeze out’ demonstrates the power of majority shareholders to forcibly acquire shares from minority shareholders and drive them out to gain absolute control over the company.

Section 236 of the Companies Act, 2013 (‘Act, 2013’) sets out a process of squeezing out minority shareholder whereby any shareholder of the company, either alone or along with person acting in concert, holding 90% or more of the total issued equity share capital, may acquire the remaining equity shares of the company by giving an offer to the minority shareholders. This “Rule of Majority” principle was recognized in a landmark case Foss v. Harbottle, where it was held that that the minority shareholders are bound by the decision of the majority shareholders and the Courts do not interfere in the internal matters of the Company. However, the powers of majority should be exercised in reasonable manner which do not result into oppression of minority. Thus, the inherent protection under the law is that the acquisition shall take place at a fair value or higher value as determined by the valuer in accordance with Rule 27 of the (Compromise, Arrangements and Amalgamation) Rules, 2016 (‘CAA Rules, 2016’).

The section 236 was incorporated under the Act, 2013 on the recommendation of the Dr. J.J. Irani Committee Report on Company Law, 2005[1] for the reason reproduced below:

“The law should enable companies to purchase the stake of minority shareholders in order to prevent exploitation of such shareholders where a promoter has bought back more than 90% of the equity. Such purchase should, however, on the basis of a fair offer. Appropriate valuation rules for this purpose should be prescribed, or, the last known price prior to delisting, could be made the benchmark for such acquisitions.”

The purpose is to ensure a seamless takeover of a company, since in view of very smallholding of the minority shareholders; the minority shareholders neither will be able to participate in the management of the company nor will be able to seek redressal of their rights or have a meaningful participation in the company’s working. Therefore, to provide fair exit to the minority shareholders and to allow majority shareholders to exercise full control over the company, section 236 has been inserted under the Act, 2013.

This write-up endeavours to analyse (1) the existing process of acquiring minority shares held in physical form, (2) the practical difficulties for acquiring minority shares held in demat form and (3) the new rules introduced vide MCA notification[2] dated 17.12.2020 setting out the procedure of transferring minority shares held in demat form.

Modus Operandi of purchase of minority shareholding held in physical form

  1. Intimation to the Company

The acquirer holding 90% of the issued equity share capital of a company to inform the company of its intention to oust the minority shareholders in accordance with provisions of Section 236 of Act, 2013. At the same time, the minority shareholders can also offer their shares to be acquired to the acquirer in compliance prescribed provisions.

  1. Determining the fair value of shares for acquisition

Fair value of the shares of the Company whose shares are being transferred in accordance with Rule 27 (Compromise, Arrangements and Amalgamation) Rules, 2016.

Fair value of the shares of the company to be offered to the minority shareholders shall be calculated by a registered valuer in accordance with Rule 27 of the CAA Rules, 2016 which provides for evaluation criteria for listed companies as well as unlisted companies.

  1. Transfer Agent

The company whose shares are being transferred to the acquirer, shall act as a transfer agent for receiving and paying the price to the minority shareholders and for taking delivery of the shares and delivering such shares to the majority.

  1. Depositing of amount in separate account operated by the Company

 The majority shareholders are required to deposit an amount equal to the value of shares to be acquired by them, in a separate bank account to be operated by the company for payment to the minority shareholders, for atleast 1 year for payment to the minority shareholders and such amount shall be disbursed to the entitled shareholders within sixty days and even thereafter by the company.

  1. Despatch of offer letter and consideration by the company

The offer letter received from the acquirer will be dispatched to the shareholders along with the consideration.

  1. Physical delivery of shares

Minority shareholders shall on receipt of offer letter, provide for physical delivery of their shares to the company within the offer period.

The point of relevance is that, the word used is “physical delivery of shares” and not physical share certificates. Accordingly, physical delivery would cover delivery of both, shares held in physical form as well as shares held in dematerialized form by minority shareholders.

  1. In case of shares held in physical form, physical delivery will be evidenced by receipt of share certificates by the Company;
  2. In case of shares held in dematerialized form, physical delivery will be evidenced by the receipt of Delivery Instruction Slips (DIS) in favor of the acquirer. Upon submission of DIS, the Depository Participant processes the DIS and debits the clients account with the said number of shares. Simultaneously, the target demat account is credited with the same number of shares.

7. Failure to tender physical delivery of shares

In the absence of a physical delivery of shares by the shareholders within the time specified by the company, such shares shall be taken as cancelled and the transferor company shall be authorized to issue shares in lieu of the cancelled shares and complete the transfer by following the applicable transfer provision and dispatching the amount paid by the acquirer in advance.

Impracticability to acquire minority shareholding held in dematerialized form

In order to ensure smooth implementation of acquisition of minority shareholding, the Act, 2013 empowers the company whose shares are being transferred to issue new shares in lieu of the undelivered shares within the time specified.

While in case of shares held in physical form, section 236(6) of the Act, 2013 is clear to state that share certificates shall deemed to be cancelled for non-receipt of physical delivery of shares and the company is authorized to issue new shares in lieu of cancelled share certificates, however, there is a difficulty in implementing the same in case of shares held in dematerialized form.

The law is silent on the procedure to be followed by the company for transferring the shares held by minority shareholders in dematerialized form, in the absence of receipt of DIS from minority shareholders. The Depositories, without any clear instructions from Ministry of Corporate Affairs (‘MCA’) or Securities Exchange Board of India (‘SEBI’), does not permit transfer of shares to the demat account of acquirer by virtue of DIS signed by the company on behalf of the minority shareholder.

Therefore, the intent of the law behind the enforcement of section 236 remains unfulfilled in case of shares held in dematerialized form as the company would not be able to give effect to the transfer in the absence of any definitive procedure laid out to give effect to the same.

MCA new rules on purchase of minority shareholding held in dematerialized form

MCA has finally woken up to the need to enable companies to purchase minority shareholding held in demat form. The CAA Rules, 2016 has been amended vide MCA notification dated 17.12.2020 where a new Rule 26A has been introduced to provide process for purchase of minority shareholding held in demat form. The detailed step-by-step process highlighting the actionable for transferor company is explained below:

  1. Company to verify the details of minority shareholders holding shares in dematerialized form

The company shall within 2 weeks from the date of receipt of the amount equal to the price of shares to be acquired by the acquirer, verify the details of the minority shareholders holding shares in dematerialised form.

  1. Company to send notice to minority shareholders informing cut-off date

The company shall send notice to minority shareholders by registered post or by speed post or by courier or by email informing about a cut-off date on which the shares of minority shareholders shall be debited from their account and credited to the designated demat account of the company, unless the shares are credited in the account of the acquirer, as specified in such notice, before the cut-off date.

The cut-off date shall not be earlier than 1 month after the date of sending of the said notice. Also, if the cut-off date falls on a holiday, the next working day shall be deemed to be the cut-off date.

  1. Newspaper publication of notice served to minority shareholders

A copy of the notice served to the minority shareholders shall also be published simultaneously in two widely circulated newspapers (one in English and one in vernacular language) in the district in which the registered office of the company is situated and also be uploaded on the website of the company, if any.

  1. Company to inform depository about the cut-off date along with a list of declarations

Immediately after newspaper publication of notice, the company shall inform the depository w.r.t cut-off date and submit the following declarations stating that:

  1. The corporate action is being effected in pursuance of the provisions of section 236 of the Act;
  2. the minority shareholders whose shares are held in dematerialised form have been informed about the corporate action [a copy of the notice served to such shareholders and published in the newspapers to be attached];
  3. the minority shareholders shall be paid by the company immediately after completion of corporate action;
  4. any dispute or complaints arising out of such corporate action shall be the sole responsibility of the company.

For the purposes of effecting transfer of shares through corporate action, the Board of Directors of the company shall authorise the Company Secretary, or in his absence any other person, to inform the depository and to submit the documents as may be required.

  1. Depository to transfer the minority shares to company on the cut-off date

Except for the shares already credited in the account of the acquirer before the cut-off date by shareholders, the depository shall transfer of shares of the minority shareholders into the designated demat account of the company on the cut-off date and intimate the company.

Note: In case a specific order of Court or Tribunal, or statutory authority restraining any transfer of such shares and payment of dividend, or where such shares are pledged or hypothecated under the provisions of the Depositories Act, 1996, the depository shall not transfer the shares of the minority shareholders to the designated demat account of the company.

  1. Company to make payment to minority shareholders

The company shall immediately upon transfer of shares by the depository, disburse the price of the shares so transferred, to each of the minority shareholders after deducting the applicable stamp duty, which shall be paid by the company, on behalf of the minority shareholders, in accordance with the provisions of the Indian Stamp Act, 1899.

  1. Depository to transfer the minority shares from company’s demat account to acquirer’s demat account

One the payment is successfully disbursed to minority shareholders, the company shall inform the depository to transfer the shares of such shareholders, kept in the designated demat account of the company, to the demat account of the acquirer.

Note: The company shall continue to disburse payment to the entitled shareholders, where disbursement could not be made within the specified time, and transfer the shares to the demat account of acquirer after such disbursement.

A pictorial presentation giving step-by-step procedure to the above requirements is summarized below:

Concluding Remarks

The majority shareholders enjoy the right to squeeze out minority shareholders to gain control over the company in toto and attain a greater flexibility in decision making. While the process of acquisition of minority shares held in physical form is clearly established in the Act, 2013, however, companies were facing it practically difficult to implement in case minority shares are held in demat form. In the absence of any clear guidelines, squeezing out minority shareholders turned out as a challenge to implement.

The new rules notified by MCA are certainly a laudable solution facilitating the majority shareholders to smoothly acquire the shares held by minority shareholders in demat form.

 

 

Other reading materials on the similar topic:

  1. ‘Comparative Analysis of provisions enabling majority shareholders to squeeze out minorities’ can be viewed here
  2. ‘Minority Squeeze Out: A strong new provision under section 236 of the Companies Act, 2013’ can be viewed here
  3. ‘Takeover under Companies Act, 2013’ can be viewed here
  4. Presentation on ‘Minority-outs under Companies Act, 2013’ can be viewed here

Our Youtube Channel: https://www.youtube.com/channel/UCgzB-ZviIMcuA_1uv6jATbg

 

 

[1] H-ttp://www.nfcg.in/pdf/23-Irani%20committee%20report%20of%20the%20expert%20committee%20on%20Company%20law,2005.pdf

[2] http://egazette.nic.in/WriteReadData/2020/223774.pdf

Corporate Restructuring- Corporate Law, Accounting and Tax Perspective

Resolution Division 

(resolution@vinodkothari.com)

Restructuring is the process of redesigning one or more aspects of a company, and is considered as a key driver of corporate existence. Depending upon the ultimate objective, a company may choose to restructure by several modes, viz. mergers, de-mergers, buy-backs and/ or other forms of internal reorganisation, or a combination of two or more such methods.

However, while drafting a restructuring plan, it is important to take into consideration several aspects viz. requirements under the Companies Act, SEBI Regulations, Competition Act, Stamp duty implications, Accounting methods (AS/ Ind-AS), and last but not the least, taxation provisions.

In this presentation, we bring to you a compilation of the various modes of restructuring and the applicable corporate law provisions, accounting standards and taxation provisions.

http://vinodkothari.com/wp-content/uploads/2020/11/Corprorate-Restructuring-Corporate-Law-Accounting-Taxation-Perspective.pdf

Schemes of Arrangement under the Scanner

Listed Companies made subject to stricter scrutiny and multilevel approvals

-Megha Mittal

(mittal@vinodkothari.com)

With the objective of empowering the stock exchanges and streamlining the processing of draft schemes filed with the stock exchanges, the Securities and Exchange Board of India has issues a Circular dated 3rd November, 2011[1] (“Amendment Circular”) thereby amending the Circular dated March 10, 2017[2] (“March, 2017 Circular”) which lays down the framework for Schemes of Arrangement by listed entities and relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The Amendment Circular shall be effective for scheme submitted to the Stock Exchange after 17th November, 2020 and for those companies which are either listed, seeking to be listed or awaiting trading approval after 3rd November, 2020.

Schemes of Arrangement is unarguably a material event for the listed company, and as such, optimum transparency, disclosure by the company, coupled with stringent checks by the Committees, viz Audit Committee and Committee of Independent Directors, becomes a very crucial factor for decision making by the shareholders.

The Amendment Circular primarily aims at ensuring that the recognized stock exchanges refer draft  schemes  to  SEBI  only  upon  being fully convinced that the listed entity is in compliance with SEBI Act, Rules, Regulations and circulars issued thereunder. While the amendments introduced, bring to light the tenet of the regulatory bodies to ensure higher levels of transparency and disclosures with respect to the proposed schemes, there also seems to be an underlying tone of stress and responsibility that has been imposed on the Audit Committee and Independent Directors to assess the viability of the proposed Schemes.

In this article, the author has given a detailed comparison of the provisions, before and after the Amendment Circular, along with comments on the same.

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Youtube Video – https://www.youtube.com/watch?v=5DNOJDB9o0k