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An Overview: Companies (Incorporation) Amendment Rule, 2019

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By Shambhavi Mishra-

The Ministry Of Corporate Affairs amended the “Companies Act, 2013” through the “Companies (Amendments) Act 2019”, informed on 31st July 2019. The Amendment Act takes into consideration the changes already listed in the “Companies (Amendment) Ordinance, 2018” which entered into effect on November 2, 2018.

The key revision to the act was generally designed for the objective to:

  • To strengthen the current scheme of justice by imposing tougher sanctions on corporations and officers in default in different provisions. Although that would increase the company’s fiscal pressure, it will also slowly reduce non-compliances. 
  • To re-classify such aggravated offences as civil defaults and void the criminal responsibility applied to these offenses. Amendment includes re-categorized certain criminals law, where violations punishable by fine and imprisonment have changed to punishment. Today, without getting through time consuming processes, the crimes will be quickly adjudicated by authorities.
  • To transit those authorizing powers from NCLT to Central Government i.e. Registrar of companies (ROC) to reduce tribunal pressure.
  • To add responsibility not only in writing but also in practice for Corporate Social Responsibility (CSR) programs performed by the organizations. 

Increased compliance with regard to the filing of records relating to the formation alteration and payment of fees; the non-maintenance of the registered office to trigger the procedure of de-registration; the keeping of directorships beyond the permitted limits to trigger disqualifications of such directors has also been implemented in the Amendment Act.

Main Highlights of the Amendment:

  1. Fiscal year Changes approval:

Any corporation or corporate entity is a “holding company” or “subsidiary company” or “associate company” of a company incorporated beyond the territory of India and is expected to pursue another financial year for the restructuring of its accounts outside India may changes its financial year with the approval of the Central Government. Until Modification, approval by the Tribunal was necessary.

  • Obtaining approval for Business Commencement:

Companies incorporated under the Amendment Act shall begin their business or exercise some borrowing powers only after sending a notice of receipt of the paid-up value of the shares by the subscribers to the memorandum and registration of the registered office within 30 days from the date of incorporation with ROC. The statement is to be issued within 180 days from the incorporation date.

  • Company’s registered office physical verification:

Registrar shall be allowed to carry out the physical inspection of a company’s registered office. If it has fair reasons to assume that the corporation does not carry out any activity or activities to delete the company’s name from the ROC[1].

  • Approval to turn Public company to Private Limited Company:

The Tribunal meanwhile had power to authorize or deny any change in the Company’s papers relating to the incorporation of a public corporation into a private company. The Central Government is strengthened according to this provision.

  • Dematerialized Form of Securities:

In the new clause[2], whereby securities whereby shares of certain class or classes of non-listed companies are kept or exchanged in dematerialized from only in the manner specified by the “Depositories Act, 1996” and the regulations made thereunder.  

  • Charges Registration ( reduced due date for filing):

The amended section by now restricting the maximum duration from 270 days to 60 days for filing an application for approval of a fee.

  • Identifying beneficial user’s responsibility:

Insertion of sub-section 4A has been inserted whereby each company shall take the necessary steps to identify a person who is substantial beneficial owner in relation to the company and require that are pursuant to the provisions of section 90. The addition of this clause provides more transparency to the company’s casting obligation to recognize and report to the registrar and report to the Registrar of “Significant Beneficial Owner”. In addition, the Central Government is empowered to lay down guidelines for the section.

  • Non-filing of Annual Return Consequences:

Fine clauses for the failure to file the annual report within the specified timeframe were amended and a further fine of Rupees 100 per day is levied on the ongoing offense up to a limit of Rupees 5 lakhs.

  • Agreements and Resolutions to be filed[3]:

 The word ‘fine’ in the penalty provision was replaced by the ‘penalty’ and an additional penalty was imposed on the continuing offense of rupees 500 per day subject to a maximum of Rupees 5 Lakhs.

  1. CSR (Corporate Social Responsibility)[4]:

Explanation has been provided for the measurement of earning in the case of newly formed firm by adding the following terms under sub-section 05 even whether the firm has not completed the three financial years since its establishments during the financial years immediately preceding. On the unspendable sum, a clause was inserted in order to move the unspent sum to a fund specified under Sch. VII within 6 months of the expiry of the financial year, unless it applies to a project ongoing.

In respect to any amount not expanded relating to an existing project, it shall be moved to a new account to be opened by the company, it shall be moved to a new account to be opened by the client as the unsupplied CSR account within 30 days of the end of the financial year and certain balance shall be expended within a span of 3 financial years from the transfer date of conversion and, in case of a loss, shall be credited to the fund listen in Sch. VII within 30 days from the date of completion of the 3rd financial year.

The company shall in case of a default be punished with a fine not to be less than 50 thousand rupees but which may extend to Rupees 25 Lakh and each officer of that company who is in default shall be punished with imprisonment for a term which may extend to 03 years or with a fine not less than Rupees 50 thousands but which may extend to Rupees 05 lakhs or both.

  1. Automatic Vacation in case of Director Disqualification:   

Under Section 164 as a new clause (i) has been inserted under as “he has not complied with the provisions of sub-section (1) of section 165”. That is one of the grounds on which a director is disqualified if he/she breaches the limits of maximum directorship permitted thereunder. Noted that filling under any of Section 164 clauses leads to an automatic vacation of office from all existing companies.

  1. Independent Directors stock options:

Provisions relating to the prohibition of independent directors from entitling stock options. This omission will have no impact, however, since section 149(9) also provides for similar prohibitions. Furthermore, the minimal fine of Rupees 1 lakh and the overall fine of Rupees 5 Lakhs has been replaced with a rupees 1 lakh penalty for the defaulting individual and in addition, if a company has made any default, the corporation is liable to a penalty of Rupees 5 lakh. 

  1. Misconduct & Oppression:

Insertion of three new sub-sections into the section where, for the purposes of class of corporations as my be specified, the case shall only be brought before the Tribunal’s Principal Bench and where, in the view of the Central Government, conditions occur as alluded to in sub-section 3 (a) (b) (c) and (d) clauses. The Central Government may lodge a case against that person and refer the same case to the Tribunal by demanding that the Tribunal examine the case and record a judgment as to whether or not that a person is an appropriate and appropriate person to hold the Director office or any other position relevant to the conduct and company management.

  1. Powers of the Tribunal in the event of Mismanagement & Injustice:

Sub-section 4A has been added to grant the tribunal responsibility for reporting its judgment at the close of the hearing in relation to sub-section (3) of Section 241, explicitly as to whether or not the respondent is a fit and suitable person to hold the position of director or any other role relating to the conduct and management of the company. 

  1. Termination or Modification of Certain Agreements[5]:

New Sub-sections (1A) and (1B) have been introduced into the law whereby, in the case of exploitation and mismanagement, a individual is considered to be improper or unacceptable under Section 242(4A).The position of a director or of any other position associated with the conduct and management of the affairs of any organization shall not be retained for a period of 5 years from the date of that decision provided that, with the leave of Tribunal, the Central Government can allow any person to hold that office before the expiry of that five-year term.

Furthermore, pursuant to Section 243(1B), any person who is terminated as Director or any other position relating to the conduct and management of company’s affairs which shall not be entitled or be compensated for the loss or termination of position.

  1. Petition for Winding up by Registrar:

Provision in sub section(3) that requires the registrar to file a wind up petition under Section 271 with the only clause stated In Section 271 that talks about the case where, by special arrangement, the Registrar does not file such a petition if the company has agreed that the company should be wound up by the Tribunal.

  1. Compounding of offences:

The amendment raised the compounding crime cap before the District Manager from Rupees 5 Lakh to Rupees 25 Lakh in Section 441 (1)(b). Furthermore, it has been explained in sub-section (6) that any offense punishable pursuant to this Act is not compoundable by imprisonment alone or by imprisonment and also by fine.

  1. Penalty on default repeated:

New addition of Section 454A was added that speaks about repeated default penalties. Under this clause, a corporation or an officer of a company or some other entity shall be liable to the double the fine amount that had already been levied under the Act. The resulting default will, however, be replicated within 3 years from the date of order that carries a penalty for earlier default.

[1] S.12 of Companies Act, 2013.

[2] S. 29 of Companies Act, 2013.

[3] S. 117 of Companies Act, 2013

[4] S. 135 of

[5] S. 243 of Companies Act, 2013.