15 November 2018

Companies (Amendment) Ordinance, 2018

15th November 2018

The Companies Act, 2013 (‘Companies Act’) was amended in the year 2017 in order to liberalise and correspond compliance requirements with other laws in force. The Ministry of Law and Justice has come up with the Companies (Amendment) Ordinance dated 2nd November 2018 (‘Ordinance’), further amending various provisions of the Companies Act. These changes were brought about by the recommendations of the Committee to Review Offences (‘Committee’) as formed by the Ministry of the Company Affairs (‘MCA’). The Ordinance promotes the intent of the government on encouraging ease of doing business. Further, it re-categorises certain punishable acts found in the category of compoundable offences to acts having civil liabilities.

The following were the key changes as brought about by the Ordinance:

Re-categorisation of offences: In accordance with the Ordinance, certain offences have been re-categorised as carrying civil liabilities to bring them under an in-house adjudication mechanism. The key provisions amended are: Prohibition on issue of shares at a discount (Section 53(3)); Non-filing of annual return within 60 days (Section 92(5)); Failure or delay in filing financial statement with the registrar (Section 137(3)); Failure by director to comply with DIN requirements (Section 159); Failure or delay in filing certain resolutions (Section 117); Failure/ delay in filing statement by the auditor after resignation (Section 140); Managerial remuneration (Section 197); Failure to annex statement of 'material facts' to notice of general meeting (Section 102(5)).

Reducing the burden on the National Company Law Tribunal (‘NCLT’): With the intent to reduce the burden on the NCLT, applications for conversion of a company from public to private and changes in financial year are to be dealt by the Central Government. Additionally, the power to rectify the register of charges has been delegated to the Regional Director. However, applications submitted prior to the Ordinance are to be dealt by the NCLT. The pecuniary jurisdiction of the Regional Director has been enhanced from INR 5 lakhs to INR 25 lakhs.

Registration of Charges: In cases where charges are created before the enforcement of the Ordinance, the registrar, on an application by the company, may allow registration of the charge, within a period of 300 days of such charge creation. If the registration of such charge is not made within 300 days, the registration of the charge can be made within six months from the date of commencement of the Ordinance. An additional period of 60 days is made available for charges created that are not registered after the enforcement of the Ordinance, on payment of an ad valorem fees.

Conditions on commencement of Business: Section 11 of the Act was omitted in 2015 and has now resurfaced as Section 10A. Section 10A lays down that no company having a share capital can commence any business or exercise any borrowing powers, unless:
  1. a director files a declaration with 6 months of incorporation stating that every subscriber to the memorandum has paid the value of shares to be taken by him
  2. a verification has been filed by the Company of its registered office within 30 days of incorporation in terms of Section 12(2) of the Act.
Where a director fails to file a declaration, the registrar, has been empowered to initiate the process for striking the name of company off the register.

Beneficial Ownership: Section 90 has been revamped and a new concept of 'significant beneficial owner' and related reporting requirements (by companies and shareholders) has been introduced. Earlier, a duty was cast on natural persons being significant beneficial owners to disclose the nature of interest and register themselves with the company.

Now, under the Ordinance, a duty has also been cast on each company to give notice to persons considered as significant beneficial owners to come forward and register themselves. In the event a response was not received, companies were empowered to apply to the NCLT, for an order seeking restrictions on transfer and suspension of all rights attached to the shares by such unregistered beneficial owners. Under the Ordinance if no person approaches the NCLT within one year, the shares will now be automatically transferred to the Investor Education & Protection Fund. In addition, non-compliance of Section 90 now carries a year's imprisonment as a discretionary component of the punishment.

Business to be carried on at the registered office: Section 12(9) has been inserted in the Ordinance, according to which if a registrar has a reasonable cause to believe that business is not being carried on by a company at its registered office, he may carry out an inspection and initiate the process for striking the name of company off the register.

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