Corporate law constitutes the basis of commercial supervision by managing the entry of corporates into the market, regulating their operations, ensuring responsibilities to shareholders, and establishing corporate governance standards. In the past few decades, India’s corporate governance framework has undergone major changes. The promulgation of the Companies Act, 2013, is generally regarded as one of the most important legal reforms in India in recent times, aiming to harmonize the Indian Company Law with global standards. The promulgation of the Company Law in 2013 and various legal reforms in the field of company law since then are aimed at promoting the formation of a commercial enterprise to conduct business and promote the development of such businesses.
In view of the Government of India's relentless efforts to promote business in India for corporations, the Corporate Law Commission (CLC) was established, composed of representatives of the Ministry of Internal Affairs and Communications Industry Chambers, professional bodies and legal bodies. On September 18, 2019, led by Mr. Inieti Srinivas MCA (Secretary-General), recommendations to decriminalize some provisions of the 2013 Company Act and promote changes in the ease of life.
The Corporate Law Commission filed its report on November 14, 2019. Following this report, the Ministry of Finance has proposed several major amendments to the Companies Act, 2013 following the Companies Amendment Bill, 2020 introduced in Lok Sabha on March 17, 2020 by the Minister for Corporate Affairs, Ms. Nirmala Sitharaman. It was then upheld by Lok Sabha on September 19, 2020, and Rajya Sabha on September 22, 2020. Finally, on September 28, 2020, the Companies (Amendment) Act, 2020 was approved by receiving the assent of the Hon`ble President of India.
2. COMPANIES (AMENDMENT) ACT OF 2020
The Companies Act (Amendment) 2020 is the most exhaustive and important of all the amended Companies Acts to date. It covers a wide range of provisions related to the rationalization and decriminalization of certain offences, along with changes to facilitate business in India. It amends a total of 61 sections and adds four sections relevant to the producer companies. The main object behind these changes is to curb negligible violations of companies especially the Small Companies and One Person Companies, that have no basis for fraud or gross negligence. This act is divided into two parts. The first part deals with the decriminalization of certain offences and the second part cover the reduction of penalties for improving the scope of doing business in India.
The Hon’ble Finance Minister Mrs. Nirmala Sitharaman presented the Union Budget 2021 on 1st February. The amendments that were brought to the Companies Act, 2013 by the union budget 2021 are mentioned below:-
2.1. Amendment in the definition of small companies
In the exercise of the powers conferred by the Central Government under the sub-sections (1) and (2) of Section 469 of the Companies Act, 2013, the Government amended the Companies (Specification of Definitions Details) Rules, 2014.
Section 2(85) of the Companies Act, 2013 defines Small Company which has now been changed by the vide Notification No. CG-DL-E-01022021-224862 dated 1st February 2021.
With the effect of these rules, the threshold limit of the companies having the paid-up share capital up to Rs 2 Crores or such higher amount as may be prescribed which shall not be more than Rs 10 Crores and have the turnover limit as per profit and loss account for the immediately preceding financials as Rs 20 Crores or such higher amount as may be prescribed which shall not be more than Rs 100 Crores shall be considered Small Companies. Provided that these shall not apply to any holding or subsidiary company, a company registered under Section 8 or a company or body corporate governed by any special Act. Before the amendment, the threshold limit for the paid-up share capital was fifty lakhs rupees or higher and the turnover limit was rupees two crores.
This is a welcome undertaking, it shall ease the compliance requirements of many companies and further elevating the “Ease of Doing Business Initiative”.
2.2. Restrictions eased for one-person companies
The object of the amendment is to benefit the start-ups, small companies and one-person companies, therefore, these provisions eased the norms for setting up of One-Person Company (OPC) by reducing the residency limit of non-resident Indians (NRI) from 182 to 120 days. Initially, only Indian citizens were allowed to form one person companies in India.
Amendment has been made in Rule 3 of the Companies (Incorporation Rules), 2014 allowing non-resident Indians with entrepreneurial potential to incorporate OPC in India with no paid-up capital and turnover restrictions. This amendment will indirectly contribute to the revival of the economy of our country because of foreign investments in India from these NRIs.
2.3. Introduction of the chapter on Producer Companies
The insertion of Part IXA to the 1956 Act in 2002, introduced the concept of producer company in India. The purpose of introducing the concept of producer company is to more effectively regulate the agrarian economy of India. A producer company is a legal entity where farmers and agriculturists cooperate with each other to improve living standards and make it easier to obtain credit, technology, and markets. The Companies Act, 2013 does not contain any separate regulatory requirements for production companies. According to Section 465 of the Companies Act, 2013, the production company continues to be governed by Part IXA of the 1956 Company Law.
The Company Law Committee propounded that since the government is interested in promoting production companies, it may be appropriate to amend and relax the laws applicable to such companies rather than wait longer to formulate new laws in this area. Consistent with the CLC proposal, the amendment act introduced provisions similar to the Companies Act, 1956 for the governance of such companies. At the outset, these provisions provide regulations with respect to incorporation, registration, formation of voting rights of members, the constitution of producer companies and other matters, share capital and members right, share capital, general meetings, powers and functions of Board, mergers and amalgamations of producer companies etc.
2.4. Start-up companies to enter into the scheme of merger and amalgamation
A start-up company is an entity incorporated or registered in India for not for more than five years, whose turnover is not more than 25 crores in any preceding financial year as per Section 2(40) of the Companies Act, 2013.
Earlier under Section 233(1) of the Companies Act, 2013, a scheme of merger or amalgamation may be entered between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed, but pursuant to the insertion of Sub-rule (1A) under Rule 25 of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.
As per this sub-rule, a scheme of Merger or Amalgamation formulated under the provisions of Section 233 of the Act, may be entered into by the following class of companies as follows:
two or more start-up companies; or
one or more start-up company with one or more small company.
The amendment to Rule 25 of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 is mainly to increase the scope of the regulations and provide start-ups with the benefits and flexibility of entering mergers and amalgamation. It will automatically lead to the growth and development of these entities.
2.5. Change in Definition of Listed Company under Section 2 (52)
Prior to the Amendment, ‘a company which has listed any of its securities on any recognized stock exchange’ was qualified Listed Company under Section 2(52) which made such companies to comply with the Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 in addition to the compliances under the Act.
The Amendment has now empowered the Central Government to exclude certain classes of companies and securities from being considered as a listed company after consultation with the Securities Exchange Board of India (SEBI). Thus, this exclusion of certain classes will ease the burden on these companies from rigorous compliance and procedural requirements under the Act and the Listing Obligations and Disclosure Requirements (LODR).
2.6. Decriminalisation of minor offences
The Amendment makes three changes with respect to the offences. Firstly, it abolishes the penalty for certain offences. For instance, the cancellation of penalties that apply to any change in the rights of a class of shareholders in violation of the Act. Also, it is noted that when no specific penalty is mentioned, the maximum fine under the Act is 10,000 rupees which extend to 1,000 rupees per day to continue defaulting. Secondly, it abolishes imprisonment for certain offences. For instance, it abolished the three-year prison sentence applicable to companies that did not comply with the law to buy back their shares. Thirdly, it also reduces the payable amount of fine in certain offences. For instance, it reduced the maximum fine for failing to submit an annual report to the Registrar of Companies from 500,000 rupees to 200,000 rupees.
2.7. Corporate Social Responsibility
Section 135 of the Act has been amended to provide that companies with net turnover, worth or profits beyond a specified amount are required to constitute CSR Committees and spend 2% of their average net profits gained in the last three financial years, towards its CSR policy.
It also states that there would no requirement of CSR Committee, where the amount is up to Rs 50,00,000 a year. Further, companies spending in excess of their CSR obligation in a financial year can set off the excess amount towards their CSR obligations in subsequent financial years.
The Board of Directors is considered competent to decide on the matters of Corporate Social Responsibility. The contravention of these provisions would result in penalties. The penalty amount for non-compliance with CSR provisions also reduces to twice the amount of calculated CSR fund or Rs. 1 Crore whichever is less in case of the company’s default. For employee defaults, 10% of the CSR fund or Rs 2.00,000, whichever is less.
2.8. Constitution of NCLAT benches
The Amendment has inserted Section 418A which intends to set up more benches of the National Company Law Appellate Tribunal (NCLAT) which will ordinarily sit in New Delhi. The said benches of NCLAT shall be constituted by at least one Judicial and one Technical Member.
Taking into consideration the quantum of cases that NCLAT has to deal with, this initiative is a welcome move that will not only reduce the burden of NCLAT but will also ensure speedy disposal of matters addressed to the NCLAT.
The Companies (Amendment) Act 2020 was introduced by the Central Government to address various provisions of the Company Law and inserted and deleted relevant sections and provisions that must be replaced in the new regulations. Minor misdemeanours have now been eliminated, and penalties for other civil torts stipulated by the law have been reduced or removed. The relaxation of the above threshold will benefit the company by easing compliance requirements, resulting in the reduction in compliances and documentation helping the businesses remain focused on their core operations which will, in turn, enhance their growth.
The Companies Act, 2013 has always attracted the attention of legislators. There was a need for significant changes in company legislation to improve the business environment in India for small and medium-sized businesses, as well as to attract foreign investment. The liberal regime will certainly attract large conglomerates to land in India and expand its trading territory. This new amendment will help small businesses and start-up foundations comply with the regulatory system. All in all, this is a welcome move towards the goal to improve the ease of doing business in the country. With the amended provisions we can hope for a better environment across the business world in India.
- Kitanjalee Singh
1st Year, B.L.S.LL.B.
Rizvi Law College