Reformation of Companies Act: Companies Amendment Act 2020
Updated: Jun 1, 2022
- Rachna Verma and Renee Gohil
The government of India introduced the Companies Amendment Act, 2020 during the ongoing Covid 19 pandemic. The government has been focusing on major reforms in the areas of corporate laws, foreign investment, arbitration, insolvency, MSMEs, etc. In 2020, India stood at the 63rd spot out of the 190 countries on the World Bank’s Ease of Doing Business. The main aim of the amendment is to create a more liberal economy and business-friendly environment in the market system. It also gives more immunity and ease than before to the big MNCs and conglomerates. There was a lot of postponement in the changes to be brought in the Act because amending everything at once might lead to chaos and readjustment problems. The Ministry of Corporate Affairs also constituted the Company Law Committee (CLC) to enhance the efficiency of courts, the effectiveness of competent authorities, and the liberalization of numerous policies to promote India's business culture and attract investment. On November 14, 2019, the CLC report recommending appropriate modifications to the Act of 2013 was forwarded to the Ministry of Corporate Affairs. It was passed by the Lok Sabha on September 19, 2020, and the Rajya Sabha on September 22, 2020, after it was introduced in Parliament. The ascension of India's President took place on September 30, 2020.
The Act was enacted with the goal of adapting to the changing national, international, and economic environments, as well as accelerating India's economic progress and growth.
The Act has been amended over 150 times in the seven years after it was enacted. The most recent update to the Companies Act, enacted in 2013, is the most comprehensive and significant of all the Companies Act amendments to date. A total of 61 provisions of the Act have been changed, and four new sections relating to producer businesses have been added. The major motivation for this adjustment is to reduce the number of minor breaches committed by businesses. The legislation is broken into two sections, the first of which deals with the decriminalization of certain offenses and the second of which deals with penalty reductions.
A few major reformations are listed down below:-
The Act established five unique forms for incorporation at the time of its creation, including separate applications for reserving a name, appointing first directors, and registering an office. In 2015, this was made easier with the introduction of an integrated form. Two years later, Simplified Proforma for Incorporating Company Electronically (SPICe) was introduced, which combined multiple services and tax registrations into a single form and eliminated the need for physical submission of paperwork. For a firm to reserve a distinctive name, a separate process was developed called Reserve Unique Name (RUN).
The method is scheduled to be changed once more, with a new SPICe+ form replacing the RUN.
Corporate Social Responsibility
Currently, any firm with a net worth of Rs 500 crore, a turnover of Rs 1000 crore, or a net profit of Rs 5 crore or more in the previous three financial years must devote 2% of its average net profit to CSR and establish a CSR Committee.
The Act now allows qualifying enterprises to set off excess CSR spending against their CSR requirements in subsequent financial years if their spending exceeds their CSR commitment in a given fiscal year. The Act also prohibits corporations with a CSR responsibility of less than Rs 50 lakh from forming a CSR Committee.
Direct listing in foreign jurisdictions
Domestic enterprises are currently not permitted to list their equity shares on international stock markets, and foreign companies are not permitted to list their equity shares on Indian stock exchanges. Depository receipts are the only way for Indian enterprises to raise finance outside of India.
The Act establishes a structure that allows domestic public corporations to list their securities directly in specified foreign jurisdictions, allowing them to tap into a wider pool of capital. This is particularly beneficial for start-ups and specialized industries, such as technology, which are continually seeking funding from open markets and may now do so without expanding or migrating to other countries.
Decriminalization of offenses
The Act intends to decriminalize certain penal sections of the Companies Act of 2013, specifically those that are minor, technical, and lack subjective assessment. The Act intends to carry out this change using the following mechanisms:
1. Reclassification of 23 compoundable offences to the In-house Adjudication Mechanism of the Adjudicating Officers, with appeals pending to the Regional Director.
2. The seven compoundable offences are not included in the penal regime.
3. For the 11 compoundable offences, only fines will be enforced.
4. A separate structure for each of the five offences.
Penalties for specific companies (One-Person Companies, Small Companies, Startup Companies, or Producer Companies) will be one-half of the penalty mentioned in the appropriate sections, up to a maximum of Rs 2 lakh for a company and Rs 1 lakh for an individual or default officer.
Exemptions from having to file resolutions
Currently, the Act requires a corporation to file copies of board resolutions issued in relation to giving loans, security, and guarantees. The Companies Act (Amendment), 2017 relaxed this requirement for banking companies. However, despite engaging in regular lending activities, Non-Banking Financial Businesses and Housing Finance Companies were never granted these exemptions, and they were required to file resolutions that impacted the secrecy of lending agreements. The Act proposes to broaden the exemption to include NBFCs and HFCS in compliance with stipulated Central Government norms.
The previous Companies Act of 1956 included Chapter-IXA to control the agrarian sector; however, this is not included in the new Act. The Act proposes inserting Chapter-XXIA into the act to create a structure for the classification of Producer Companies, as well as relaxations and benefits provided to them, similar to the 1956 Act. These would include things like running meetings, managing memberships, and keeping track of finances, among other things.
Exclusion from listed companies
A "listed firm" under the existing framework includes private corporations that choose to list their debt securities on stock exchanges without listing their shares but are nonetheless subject to the rigours of statutory compliance, discouraging private corporations from listing debt securities. To encourage private firm listing, the act proposes removing corporations that issue specific kinds of securities from the definition of "listed company."
The Companies Act of 2013 has always been on the minds of policymakers. There was a need for significant changes in corporate legislation to improve the business environment in India for small and medium-sized firms while simultaneously attracting foreign investment. Liberal regimes will undoubtedly entice large multinationals to set up shop in India and grow their corporate operations. This new amendment act will assist small businesses and startup foundations in remaining in conformity with regulatory systems. Small insignificant offenses have been removed, and penalties for various civil wrongs under the act have been lowered or altogether.
While policy implementation will continue to be a major challenge, adding a second layer of impediments to the ease of doing business, the government must focus its efforts on reviving the economy as a first step. This would not only boost investor and business confidence but would also lay a solid foundation for economic growth. These are extraordinary times, and such economic measures will enhance the confidence of businesses that are now experiencing financial, human resource, supply chain, and regulatory challenges.
Rachna Verma and Renee Gohil are second year students at Pravin Gandhi College of Law, Mumbai.
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