Companies (Amendment)Act, 2019 ( GS 3 ) EMPOWER IAS

Companies (Amendment)Act, 2019

 

Mains Q:

Discuss the key provisions brought by recently amended companies’ act 2019 with respect to CSR. How CSR will contribute towards economic, social and environmental development that creates positive impact on society at large?

 

In news:

• Government is looking to decriminalise most offences under companies law. 

 

Context

• Concern mounted after recent changes to CSR provisions made violations a criminal offence liable to jail of up to three years. 
• A criminal offence can lead to imprisonment for executives in the event of a conviction
• Only the gravest breaches will remain criminal offences in the comprehensive cleanup being planned. 
• Key amendments of the Companies Act have now made Non-compliance with CSR norms a jailable offence for key officers of the company, apart from hefty fines up to ₹25 lakh on the company and ₹5 lakh on the officer in default. 
• The government has already decided not to operationalise the new corporate social responsibility (CSR) provisions in the recently amended Companies Act.
• The government’s decision was in line with recommendations of a high-level committee headed by corporate affairs secretary Injeti Srinivas  on corporate social responsibility. Key recommendation are:

 

Key recommendations of the committee: 

• On the specific issue of penalties, the committee has proposed that non-compliance be de-criminalised and made a civil offence.
• “CSR is a means to partner corporates for social development and such penal provisions are not in harmony with the spirit of CSR
• CSR should not be treated as another tax on businesses.
• Every company with a net worth of ₹500 crore or turnover of ₹1,000 crore or net profit of ₹5 crore should spend 2% of the average profits it made over the previous three years on social development.
•  Filings with the Ministry of Corporate Affairs show that in 2017-18, only a little over half of those liable to spend on CSR have filed reports on their activity to the government.
• The average CSR spend by private companies was just ₹95 lakh compared to ₹9.40 crore for public sector units. 
• It has also recommended that unspent CSR funds be transferred to an escrow account within 30 days of the end of the financial year.
• It should be recognised that CSR is not the main business of a company and in these challenging times they would rightly be focusing their energies on the business rather than on social spending.
•  The government should be careful to not micromanage and tie down businesses with rules and regulations that impose a heavy compliance burden.

 

Criminal offences  A host of violations under the companies law are treated as criminal offences and are punishable by imprisonment in contrast with the global practice of treating white-collar crimes, barring grave ones, as compoundable and settled with a fine Among those regarded as criminal offences are providing misleading information in a prospectus, refusal to register shares, tampering with the minutes of meetings, failure by a director to disclose his interest, loans given to directors in violation of rules and breaches of related-party transaction regulations .   Corporate Social Responsibility Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives , while at the same time addressing the expectations of shareholders and stakeholders. Some major CSR concerns are - social equity, human rights, gender balance, environmental management, good governance, community relations and anti-corruption measures. India has become the first country to make CSR spending mandatory through a law, i.e. through Section 135 of the Companies Act, 2013.   NCLT: The National Company Law Tribunal is a quasi-judicial body in India that adjudicates issues relating to Indian companies  The tribunal was established under the Companies Act 2013 and was constituted on 1 June 2016 by the government of India and is based on the recommendation of the Justice Eradi  committee on law relating to insolvency and winding up of companies

 

 

 

 

 

 

 

Key provisions of the Companies (Amendment)Act, 2019:

• The Companies (Amendment) Act, 2019 (the Act) came into effect July 31, 2019 and replaced the Companies (Amendment) Second Ordinance, 2019 with certain additional amendments.
• It amends several provisions in the Companies Act, 2013 relating to penalties, among others.
• Key  provisions are:
  • Issuance of dematerialised shares: Under the Act, certain classes of public companies are required to issue shares in dematerialised form only.  The Bill states this may be prescribed for other classes of unlisted companies as well.  
  • Corporate Social Responsibility(CSR):
    • CSR  is now mandatory and unspent amount to go to PM’s funds
    • Companies are now obliged to transfer their unspent CSR funds to one of the funds prescribed under Schedule VII of the Act (such as the Prime Minister Relief Fund) within six months of the end of the financial yea
    • A major focus of the amended Act is on CSR   spending.
    • If the CSR funds are committed to certain ongoing projects, the company must transfer the amount to an unspent account with a scheduled bank within 30 days from the end of the financial year. 
  • Re-categorization of certain offences:
    • The Act has brought about 16 corporate offences under the ambit of civil liability, including failure to file annual returns and financial statements within a specified time frame, and issuance of shares at a discount.
    • These offences, which earlier attracted criminal proceedings against the offender, are now liable for a penalty.
  • Debarring auditors: 
    • Under the Act, the National Financial Reporting Authority debar a member or firm from practising as a Chartered Accountant for a period between six months to 10 years, for proven misconduct. 
    •  The Bill amends the punishment to provide for debarment from appointment as an auditor or internal auditor of a company, or performing a company’s valuation, for a period between six months to 10 years.
  • Commencement of business:
    • The Act requires companies to file a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of Association (MoA) of the company has paid for the shares agreed to be taken by them.
    • The companies must also file documents stipulating the verification of their registered address with the Registrar of Companies (ROC) within 30 days of incorporation. 
  • Unfit persons not to manage companies
    • If the federal government is of opinion that the affairs of the company are being conducted in a manner that is detrimental to public interest, it may itself apply to the National Company Law Tribunal (NCLT) for an order to prevent mismanagement and oppression in the company.
  • Associates of foreign companies may follow different financial year for accounting:
    • The amendments now extend this exception to associates of a foreign company as well as to a subsidiary of a foreign company that follows a different financial year.
    • Also, the companies can now make the application to the federal government rather than the NCLT – speeding up the time period for processing applications.
  • Disgorgement of properties in case of corporate fraud:
    • In case of corporate fraud revealed by an investigation by the Serious Fraud Investigation Office (SFIO), the government may make an application to the NCLT to pass appropriate orders for the disgorgement or giving up of profits or assets of an officer or person or entity, which was obtained an undue benefit.
  • Registration of charges:
    • The Act requires companies to register charges (such as mortgages) on their property within 30 days of creation of charge.  
    • The Registrar may permit the registration within 300 days of creation.  
    • If the registration is not completed within 300 days, the company is required to seek extension of time from the central government. 
  • Change in approving authority: 
    • Under the Act, change in period of financial year for a company associated with a foreign company, has to be approved by the National Company Law Tribunal.
    •  Similarly, any alteration in the incorporation document of a public company which has the effect of converting it to a private company has to be approved by the Tribunal. 
    • Under the Ordinance, these powers have been transferred to central government.  
  • Compounding: Under the Act, a regional director can compound (settle) offences with a penalty of up to five lakh rupees.  The Ordinance increases this ceiling to Rs 25 lakh. 
  • Issue of shares at a discount: 
    • The Act prohibits a company from issuing shares at a discount, except in certain cases. 
    • On failure to comply, the company is liable to pay a fine between one lakh rupees and five lakh rupees every officer in default may be punished with imprisonment up to six months or fine between one lakh rupees and five lakh rupees. 
    •  The Ordinance changes this to remove imprisonment for officers as a punishment.  

Impact:

• Effective enforcement: The changes are expected to lead to greater compliance by corporates, de-clogging of the special courts, de-clogging of the NCLT and effective enforcement
• Reduce work load of NCLT: 
  • At present around 60 percent of the 40,000 odd cases pending in courts pertain to sections dealing with procedural lapses that are proposed to be shifted to in-house adjudication mechanism thereby incentivizing compliance by corporates.
  • As a result of the amendments brought in, in future, the compounding cases load on NCLT will also come down significantly.
  • The existing cases will be withdrawn from special courts by bringing out an amnesty scheme as there are inherent benefits in prescribing civil liabilities for procedural lapses instead of undertaking a criminal trial.  
• Reduce burden of special courts: The burden on special courts would be drastically reduced and more effective and speedy progress of the more serious cases would be possible
• Registrar of Companies (ROC): This would also allow ROCs to more effectively pursue action against serious offences, it is also proposed to amend the Rules to ensure that adjudicating officers (Registrar of companies) dispose-of adjudicating proceedings within stipulated time limits which would have to be rigorously followed. 
• Improving Ease of doing business: Aimed at improving ease of doing business and also reducing the compliance burden on the companies, especially the smaller ones.
• Better corporate governance: It will ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector”. 

 

Concerns:

• Insider and forward trading: The amendment to delete Section 195 and 196 has been opposed which provide for prohibition of insider and forward trading.
• Proposal to give loans: Proposal to give loans to directors and persons has been opposed, saying a company should not give loans to the director or to those of interest to a director.
• Reiteration of the government: The bill is said to be a reappearance of the government to secure private capital and extend help to private corporates and big companies.

 

Conclusion:

The amendments introduced are primarily to re-categorize the existing penal provisions as civil defaults for those provisions which are more likely of administrative nature as recommended by the Injeti Srinivas Committee. In view of the amendments, it is definitely a welcome step towards ensuring corporate compliance in a systematic manner.

Source)

https://www.thehindu.com/opinion/editorial/making-csr-work/article29112880.ece?homepage=true