Publications

In wake of the high pitched ‘Ease of Doing Business’ clarion call, the Indian Government proposed the fourth amendment to the (Indian) Companies (Amendment) Act, 2020 (amendment), which was passed by the Parliament and received Presidential assent around the same time last month. Amongst the many changes, the new Act relaxes the regime and eases the risks faced by Companies for minor technical non-compliance through de-criminalizing as many as 49 minor offenses by removing penalties, reducing the quantum of fines and by doing away with imprisonment for such offenses.

By discussing some of the new changes which the new Amendment brings with it, this article examines whether or not they are in fact, in alignment with the Government’s vision or are these changes notional. Is there a need for even bolder reforms to help chaperone India’s economy with the malicious placidity which the pandemic has brought with it?

First, Section 62 which provides for the time limit for ‘rights offers’, stands amended by allowing the Government to specify a shorter period as opposed to the earlier 15-day minimum requirement. Although this allows the Companies leeway to raise capital much faster, whether or not this will actually be as useful for Companies is something that can only be decided in the course of time.

Second, in having placed a draft of the proposed Corporate Social Responsibility (CSR) rules seeking public opinion, India’s renewed enthusiasm towards pushing Corporate India to acknowledge its role as a partner in socio-enviro-economic development is apparent. As a first step towards the realization of this ideology, Section 135 has been amended and now provides for heavy penalty for default by both the Company and the employee/official responsible to the tunes of USD 135,000 and USD 3,300 respectively. By being the world’s first country to penalize for a failure to engage in altruism, this amendment is reflective of India’s commitment towards CSR. Apart from this, by allowing Companies to set off the amounts spent towards CSR activities in excess of the 2% statutorily mandated, the amendment seeks to encourage participation by Companies in India’s demographic development.

Third, the amendment completely does away with the proviso to Section 379(1) and broadens the scope of exemptions that can be granted by the Central Government to foreign companies or companies incorporated or to be incorporated outside India, from a few Sections of Chapter XXII, to any Section in the entire chapter. From the perspective of foreign Companies, whether or not this will actually spell respite from compliances will depend largely upon such proposals being mooted by the Government and subsequently passed by the Parliament, which can be quite uncertain as well as a time-consuming proposition.

Fourth, pecuniary penalties under the Amendment have been heavily reduced specifically, under Sections 64, 92, 117, 137, 140 & 165 which prescribe fines upon failure to provide notice of alteration of share capital, failure to file the annual return, failure to file resolutions and agreements, failure to file copies of financial statements, failure to limit the number of directors respectively.

Fifth, the punitive imprisonment has been removed for under Section 392 which provides for penalty for violation of the provisions of Chapter XXII by foreign Companies and their officials. Likewise, the following contraventions also, no longer carry imprisonment as punishment:

· Section 8 and 26 relating to compliance with the requisites pertaining to setting up of Companies with charitable objects and representations in the prospectus respectively;

· Section 40 relating to contraventions in connection with securities dealt with in stock exchanges;

· Section 68 relating to a contravention by Companies in the manner and mode of buy back their own securities;

· Section 28 which provides for liability upon Managing Directors, Chief Financial Officers for non-compliance with the manner and mode of maintenance of books of accounts, etc by Companies;

· Section 147 which provides for penalty in cases of contraventions to Chapter X which provides for audit and auditors.

Sixth, Independent Directors can breathe a sigh of relief as succor has been inserted in the form of a proviso to Section 149 (9) which states that, “Provided that if a company has no profits or its profits are inadequate, an independent director may receive remuneration, exclusive of any fees payable under sub-section (5) of section 197, in accordance with the provisions of Schedule V.”, thereby making it possible for them to be remunerated even if an entity is accruing losses.

Seventh, another big relief to both litigants as well as the adjudicatory body comes is by way of conferring upon the Central Government, the power to set up benches of the National Company Law Appellate Tribunal or NCLAT, which is the Apex Appellate body that deals with appeals against orders passed the National Company Law Tribunal or NCLT and the Competition Commission of India. Also, by removing the embargo on the maximum number of members to be appointed in NCLAT, the amendment seemingly has made an effort to deal with the rising number of disputes that the Tribunals are having to face and which the pandemic has aggravated. This also will benefit foreign investors and foreign companies alike as this would certainly mean faster dispute resolution, something which any investor would like to be reassured of, especially given India’s ignominious track record of adjudicatory delay.

Overall, the new amendment does indeed provide respite to foreign investors and foreign companies who have or are mulling on making an investment in India. By decriminalizing many offences and reducing the corresponding fines as well as relaxing the rigors of many minor compliances, the Act does indeed reveal a positive intention on the part of the Government as well as the Parliament, to provide a flexible ecosystem for both foreign investors and foreign companies. These steps are also beneficial for start-ups and Small and Medium Enterprises, which lack experience or resources needed towards minor compliances and on this score too, the amendment augurs well with the ‘Ease of Doing Business’ ideology. Further, having conferred upon the Central Government several powers to grant exemptions is also quite a sizeable feat, however, only time will tell whether or not it actually does translate into an advantage given India’s endemic problems of bureaucratic red tape-ism and the ever frequent Parliamentary session logjams. Finally, adding NCLT benches and removal of the limit on members for the benches, are substantial moves that would definitely ease the process of dispute resolution, something which any investor would want in the interest of their investment.