Companies Act To Be Amended Again: Top 7 Proposed Changes

To ensure more accountability and better enforcement, the government has proposed several amendments to the Companies Act, 2013. The changes seek to replace previous ordinances—issued in November last year and January, February this year—and add provisions to strengthen the corporate governance norms.

Here are the seven key proposed changes to watch out for:

Unspent CSR Amount

Currently, a company fulfilling the specified criteria must spend an amount equal to 2 percent of its average net profits during the immediate three preceding financial years on corporate social responsibility activities. The company law doesn’t specify the treatment of unspent amount on any ongoing project after the end of a financial year or the amount lying unspent in the CSR corpus of a company.

The bill introduces provisions to ensure that companies expend such unspent amounts. And so, it has proposed that a company must:

• Transfer any unspent amount relating to any ongoing project within 30 days from the end of a financial year in a designated bank account called “unspent corporate social responsibility account”. This amount must be spent within a period of three years from such transfer.
• Transfer any unspent amount that can’t be mapped to a particular project to a specified central government fund within six months from the end of a financial year.

Penalties For Non Compliance

In order to ensure better compliance, the government has proposed several new penalties:

• Failure to comply with transfer of unspent CSR amount: A fine of Rs 50,000 on the company which may extend upto 25 lakh. For a defaulting officer, a fine ranging between Rs 50,000 to Rs 5 lakh or imprisonment is proposed.
• Failure to file annual return: Company and every officer responsible will be liable to pay a penalty of Rs 50,000 and additional penalties for continuing failure.
• Penalty for fraud: Any person found guilty of a fraud which does not involve public interest and the amount is less than Rs 10 lakh or 1 percent of turnover of the company—such person will be liable for a maximum penalty of Rs 50 lakh. Currently, the limit is Rs 20 lakh.

Director Disqualification

The bill proposed to add an additional ground for disqualifying a person as a director. As per the law, a person cannot be a director in more than 20 companies or 10 public companies. The proposed change says that any person who breaches these limits will be disqualified from acting as a director.

Significant Beneficial Owner

The government had introduced the requirement to identify the significant beneficial owner in a company to curb the menace of shell companies and trace true ownership. Section 90 of the Companies Act, 2013 says that every individual—acting alone or together—who is a significant beneficial owner must disclose this fact.

The bill proposes to also put the onus of compliance on companies with this provision. As per the bill, a company must take necessary steps to identify an SBO and the person is required to make the declarations specified under the Companies Act.

Verification Of Registered Office

The fifth major change relates to verification of the registered office by the Registrar of Companies. As per company law, every new company must have a registered office within 30 days of its incorporation. Similarly, every existing company must have a registered office throughout its existence. To curb the menace of shell companies, the amendment provides the following powers to the registrar:

• Carry out physical verification of the registered office of the company if the registrar has reasonable cause to believe that a company is not carrying on any business, and
• Initiate action for removing a company’s name from the register if a company fails to have a registered office.

Oppression And Mismanagement

The sixth major change relates to cases involving oppression and mismanagement in companies. The proposed change considerably increases the scope of against whom can such a case be brought against by the central government.

It seeks to extend it to any person who:

• Is concerned about the conduct and management of the affairs of the company and is guilty of fraud, misfeasance or persistent negligence, or there’s a default in carrying out his functions or for breach of trust.
• Is in-charge of management of the company and fails to carry out the functions in accordance with sound business principles or prudent commercial practices;
• Conducts business of the company in a manner which can cause damage or injury to the company or the industry or conducts affairs of the company to defraud the creditors, or members of the company or any other person.

The proposed amendment is relevant in the context of ongoing proceedings in the IL&FS case, where the government is seeking to prosecute the company’s erstwhile auditors—Deloitte Haskins & Sells and BSR Associates. This month, the Mumbai bench of the National Company Law Tribunal had allowed the government to implead both these entities in the case These auditors have been arguing that no case of oppression and mismanagement can be brought against them since they ceased to be auditors of IL&FS when the case was initiated by the ministry.

Another key proposed change for oppression and mismanagement cases pertains to modifying the NCLT’s jurisdiction. It’s been proposed that the central government can specify that cases relating to oppression and mismanagement at specified class of companies can be filed only with the principal bench of the NCLT in Delhi. Currently, any bench of the NCLT can deal with an oppression and mismanagement application.

NFRA’s Powers

The government has proposed to widen the powers of the National Financial Reporting Authority to debar an individual auditor or a firm. Currently, the NFRA can debar a member of the Institute of Chartered Accountants of India or a firm for a period ranging between six months to 10 years.

As per the proposed amendment, the NFRA can now ban a member of ICAI or a firm from:

• Acting as a statutory or internal auditor
• Undertaking any audit of financial statement
• Performing audit of the functions and activities of a company or body corporate
• Performing any valuation work under the Companies Act.

Besides these amendments, the bill has also proposed to increase the powers of regional director to compound offences under the Companies Act. Any offence under company law which involves a penalty of up to Rs 25 lakh can be compounded by the regional director once the bill is passed.