GOVERNMENT INJECTS MORE FUEL TOWARDS EASE OF DOING BUSINESS IN INDIA

 The Bill proposes as many as 72 changes to the Act aiming towards “ease of doing business” and

ease of living to corporates”;

 Around 23 offences would be recategorized out of the 66 compoundable offences under the Act,

to be dealt with an in-house adjudication framework to reduce compliance burden and overall

pendency of the courts;

 Omits 7 compoundable offences to remove penal provisions in certain cases;

 Paves way for direct overseas listing of certain class of Indian companies albeit certain conditions;

 Allows payment of compensation to non-executive directors including independent directors, in

case of no profits or inadequacy of profits;

 Seeks to exempt those companies whose CSR obligation is below INR 5 Million from constituting

the CSR Committee;

 Introduces new chapter XXIA on “producer companies”;

 Lowers the quantum of monetary penalties for compliances lapses by start-ups.

 Removes criminality for minor procedural and technical lapses which do not have elements of

fraud, injury to the public interest;

 Remove provisions of imprisonment as penalty in various sections and reduces the quantum of

monetary penalties in case of various compoundable offences;

Government introduced the Companies (Amendment) Bill, 2020 (“the Bill”) in the Lok Sabha on March 17,

2020 to further amend certain provisions of the Companies Act, 2013 (“the Act”). Since the notification of

the Act in 2013, it has been amended time to time by the Government including thrice by way of the

Companies Amendment Act and this is the fourth such amendment proposed in Lok Sabha. The Bill

proposes to make several amendments which inter alia includes decriminalising various minor offences,

omission of few compoundable offences. The Bill proposes as many as 72 changes to the Act with a view

to provide greater ease of living to law abiding corporates.

Ministry of Corporate Affairs (“MCA”) in its endeavor to continue the re-categorization of offences from

criminal to civil nature, constituted a Company Law Committee (“CLC”) consisting of representatives from

the Ministry, Industry Chambers, Professional Institutes and legal fraternity on September 18, 2019. CLC

was tasked with making recommendations to the Government inter alia to decriminalise some more

offences of the Act based on their gravity and to take other measures to facilitate and promote ease of

doing business and ease of living for corporates in the Country. After careful analysis, CLC submitted its

report on November 18, 2019.

Based on the recommendations of the CLC and internal review by the Government, the said Companies

(Amendment) Bill, 2020 was introduced by Government in the Parliament and was passed by Lok Sabha

on September 19, 2020 and Rajya Sabha on September 22, 2020. In total, there are 66 clauses in the Bill

through which amendments will be carried out in the Act. When this Bill comes into force (on receipt of

President’s assent), it may be called as”Companies (Amendment) Act, 2020”

The objective of the Bill is to decriminalise minor procedural or technical lapses under the provisions of the

said Act, into civil wrongs; and considering the overall pendency of the courts, a principle based approach

was adopted to further remove criminality in case of defaults, which can be determined objectively and

which otherwise lack any element of fraud or do not involve larger public interest and also introduce

provisions for Producer Company in the Act. In addition, the Government also proposes to provide greater

ease of living to corporates through certain other amendments to the Act.

Key highlights of the Bill:

i. Direct overseas listing of securities: Bill paves way for certain class of companies to issue such class

of securities for the purpose of listing on the permitted stock exchanges in permissible foreign

jurisdictions or such other jurisdictions, as may be provided in the rules. Bill seeks to empower Central

Government, in consultation with the Securities and Exchange Board of India, to amend the definition

of “listed company” as defined in sub-section (52) of section 2 of the Act by excluding certain

companies, based on listing of certain class/kind of securities on the recognized stock exchanges. The

objective of this amendment is to exclude such private companies that list their debt securities on a

recognized stock exchange upon their allotment on private placement basis, thereby falling under the

definition of a ‘listed company’ under the Act.

ii. Much needed relaxations around Corporate Social Responsibility provisions:

Exemption from constituting the CSR Committee: Bill seeks to exempt the companies which are falling

under the ambit of the provisions of Corporate Social Responsibility (“CSR”) and their CSR spending

obligation is not more than INR 5 Million, from constituting the CSR Committee. This, however, will

raise more questions as the CSR spending obligation may fall below INR 5 Million and, in that case,

should the corporates continue to mandatorily have the committee or dissolve committee. Hence, this

proposed amendment will raise further questions in the industry if it is put to implementation as is.

Set off of excess CSR spends: The purpose of this amendment is to allow companies, which have spent

an amount in excess of the requirement provided under sub-section (5) of section 135 of the Act, to

set off such excess amount out of their obligation in the succeeding financial years in the manner

provided under CSR rules. This change would also encourage the corporates to spend more when the

company has performed exceedingly well in the hope of setting off the excess spent in the subsequent

years when the corporates do not find value adding projects or financial performance is not better than

previous years or to manage the funds efficiently. Need to wait and watch for how many subsequent

years and what quantum of excess spent can be set-off.

Monetary penalties for defaults: Bill propose to substitute yet to be notified penalty provisions under

section 135 of the Act by providing only monetary penalties for defaults in CSR provisions as against

the imprisonment for officers in default.

iii. Remuneration to Non-Executive Director and Independent Director: Bill proposes to amend Section

149 and section 197 of the Act, to make provisions for allowing payment of adequate remuneration

to non-executive directors (including the independent directors) in case of no profits or inadequacy of

profits, by aligning the same with the provisions for remuneration to executive directors in such cases.

The subsequent changes in schedule V of the Act should also be made;

iv. Decriminalisation of offences and replacing them with monetary policy: To decriminalise certain

offences under the Act in case of defaults which can be determined objectively, and which otherwise

lack any element of fraud or do not involve larger public interest. Around 23 offences would be

recategorized out of the 66 compoundable offences under the Act, to be dealt with an in-house

adjudication framework and omits 7 compoundable offences to further strengthen the ease of doing

business.

v. Producer Companies: Bill proposes to introduce a new chapter XXIA in the Act in relation to ‘Producer

Companies’. Erstwhile Companies Act, 1956 had a chapter on Producer Companies and now with this

move, Bill seeks to reinstate brand new provisions on “Producer Companies” in the Act. These new

provisions pertain to the membership, conduct of meetings, maintenance of accounts and also

appointment of company secretary to certain prescribed class of producer companies. It is unknown

why It took almost 6 years for MCA to realize the need for provisions of “Producer Companies” after

omitting the same when the Act was introduced in 2014 replacing the erstwhile Companies Act, 1956.

vi. Exemptions from filing resolutions: Bill seeks to extend the exemptions to certain classes of non-

banking financial companies and housing finance companies from filing of certain resolutions passed

to grant loans or give guarantees or to provide security in respect of loans under clause (f) of sub-

section (3) of section 179 of the Act in the ordinary course of their business. Such amendments have

been proposed with the intention of securing the confidentiality obligations and reducing the burden

of the non-banking finance companies from additional compliances.

vii. Fee for additional filing: Bill seeks to provide relaxations to provisions relating to charging of higher

additional fees for default on two or more occasions in submitting, filing, registering or recording any

document, fact or information as provided in section 403 of the Act.

viii. Lesser penalties to producer companies and start-ups as well: Bill proposes to extend the applicability

of section 446B of the Act which deals with ‘lesser penalties for small companies and one-person

companies’, to all provisions of the Act which attract monetary penalties and also extend the same

benefits to Producer Companies and start-ups.

ix. Exemption to certain class of public companies: Bill seeks to exempt certain class of public companies

whose securities are listed in permissible foreign jurisdictions from compliances of the provisions of

Chapter III, Chapter IV, sections 89, 90, 127 of the Act.

x. Exemption to certain class of persons – Bills empowers the Central Government to exempt such class

or classes of persons, in the public interest either conditionally or unconditionally, from complying with

the requirements of section 89 sans sub section (10) of section 89 of the Act relating to ‘declaration

of beneficial interest in shares. It appears that, this amendment is aimed to clear the air around the

exemptions to Trusts, Funds, etc.

xi. Reducing timelines for rights issue – Bill proposes to fast pace the process of issuance of shares on

rights basis under the provisions of section 62 of the Act by reducing the timelines for offer period by

less than 15 days. Relevant rules may have to be changed once the proposed amendment is

incorporated in the Act.

xii. Exemption to certain class of foreign companies: Bill seeks to exempt class of foreign companies or

companies incorporated outside India from the provisions of Chapter XXII of the Act relating to

companies incorporated outside India.

xiii. Constitution of benches of NCLAT: Bill empowers the Central Government, in consultation with the

chairperson, to set up additional Benches of the National Company Law Appellate Tribunal to hear

appeals under Competition Act, 2002 and the Insolvency and Bankruptcy Code, 2016. These shall

ordinarily sit in New Delhi or such other place as may be notified.

xiv. Financial statements for certain class of unlisted companies – Bill provides for specified classes of

unlisted companies to prepare their periodical financial results and seek approval of the Board of

Directors and complete audit or limited review of such periodical financial results in such manner as

may be prescribed and file the same with Registrar within 30 days of completion of the relevant period

with such fees as may be prescribed.

Conclusion:

While the intention behind the Bill, inter alia, is to decriminalise more offences, reduce the monetary

penalties, burst the bubble around the CSR provisions which pushed the corporate world into panic, create

business friendly environment, etc., the Government, this time, has come up with a different ideology of

“ease of living to law abiding corporates”.

Though the Government is trying to create a better living for the corporates, there are still a few misses

and may be the India Inc need to wait for another round of amendments.

More clarity is required in respect of Significant Beneficial Ownership (“SBO") provisions. Lack of clarity in

the Act and the rules framed thereunder for identification of SBO and delay in implementation of certain

provisions of SBO makes it very difficult to justify the intent of SBO provisions. Further, certain other

provisions related to private placement of securities, related party transactions, disqualification of

directors, vacation of office of directors, activation/deactivation of Director Identification Number need to

be revisited.

It would be great to marry “easy of doing business” with “ease of living for corporates” to reap better results

for everyone’s good!

- Swift team

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