Analysis and implication of the amendments introduced through the Companies (Amendment) Act, 2019

S. No.

Section/ Provisions and date of Notification

Existing Provisions

Amendments

Implication

Section 26 (Matters to be stated in Prospectus)

Notified w.e.f. 15.08.2019

(4) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication, there has been delivered to the Registrar for registration a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorised attorney.

(5) A prospectus issued under sub-section (1) shall not include a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or management, of the company and has given his written consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the Registrar for registration and a statement to that effect shall be included in the prospectus.

(6) Every prospectus issued under sub-section (1) shall, on the face of it,-

1. state that a copy has been delivered for registration to the Registrar as required under sub-section (4); and
2. specify any documents required by this section to be attached to the copy so delivered or refer to statements included in the prospectus which specify these documents.

(7) The Registrar shall not register a prospectus unless the requirements of this section with respect to its registration are complied with and the prospectus is accompanied by the consent in writing of all the persons named in the prospectus.

• In sub-sections (4), (5) and (6), for the word 'registration', the word 'filing' has been substituted.

• Sub-section (7) has been omitted.

By the virtue of this amendment, the requirement for registration of a prospectus with the Registrar has been dispensed with and now the prospectus is only required to be filed with the Registrar as a procedural requirement and also to correspond to the said amendment, the provisions providing for the obligation of Registrar to register the prospectus, subject to compliance of all the provisions, have been omitted.

Section 29 (Public offer of securities to be in dematerialised form)

Notified w.e.f. 15.08.2019

1. Notwithstanding anything contained in any other provisions of this Act,-

1. every company making public offer; and

2. such other class or classes of public companies as may be prescribed

shall issue the securities only in dematerialised form by complying with the provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder.

• In sub-section (1), in clause (b), the word 'public' has been omitted;
• After sub-section (1), the following sub-section has been inserted, namely:-

'(1A) In case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder'.

As per the new rule 9A of the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, dated September 10, 2018, only Unlisted Public Companies were mandated to issue securities in Dematerialised form.

Now, by the virtue of this amendment, the Government would prescribe certain class of Companies (not restricted to public companies), which would be mandatorily required to issue the securities in dematerialised form only.

Section 35 (Civil liability for mis-statements in prospectus)

Notified w.e.f. 15.08.2019

(2) No person shall be liable under sub-section (1), if he proves-

(a) that, having consented .................... or consent or,

(b) that the prospectus ................ knowledge or consent.

(c) that, as regards every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by sub-section (5) of section 26 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus for registration or, to the defendant';s knowledge, before allotment thereunder.

In section 35 of the principal Act, in sub-section (2), in clause (c), for the words 'delivery of a copy of the prospectus for registration', the words 'filing of a copy of the prospectus with the Registrar' have been substituted.

The reference of 'Registration of Prospectus with the Registrar'; has been replaced by 'Filing of copy of Prospectus with the Registrar';, in correspondence to the amendments made in Section 26 of the Act, as discussed above in point no. 1.

Section 90 (Investigation of beneficial ownership of shares in certain cases)

Notified w.e.f. 15.08.2019

(1) Every Individual.................., as may be prescribed.

Provided that.........sub-section.

(2) Every Company............ as may be prescribed.

(3) The register...... as may be prescribed.

(4) Every Company......... as may be prescribed.

(5) A Company........this section.

(6) The information......the notice.

(7) The Company shall......... as may be prescribed.

(8) On any application.......... as may be prescribed.

(9) The company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions placed under sub-section (8), within a period of one year from the date of such order:

Provided that if no such application has been filed within a period of one year from the date of the order under sub-section (8), such shares shall be transferred, without any restrictions, to the authority constituted under sub-section (5) of section 125, in such manner as may be prescribed.

(10) If any person............failure continues.

(11) If a company, required to maintain register under sub-section (2) and file the information under sub-section (4), fails to do so or denies inspection as provided therein, the company and every officer of the company who is in default shall be punishable with fine which shall not be less than ten lakh rupees but which may extend to fifty lakh rupees and where the failure is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the failure continues.

In section 90 of the principal Act,-

(i) after sub-section (4), the following sub-section has been inserted, namely:-

'(4A) Every company shall take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section.';

(ii) for sub-section (9), the following sub-section has been substituted, namely:-

'(9) The company or the person aggrieved by the order of the Tribunal may make an application to the Tribunal for relaxation or lifting of the restrictions placed under sub-section (8), within a period of one year from the date of such order:

Provided that if no such application has been filed within a period of one year from the date of the order under sub-section (8), such shares shall be transferred, without any restrictions, to the authority constituted under sub-section (5) of section 125, in such manner as may be prescribed.';

(iii) after sub-section (9), as so substituted, the following sub-section has been inserted, namely:-

'(9A) The Central Government may make rules for the purposes of this section.';

(iv) in sub-section (11), after the word, brackets and figure 'sub-section (4)', the words, brackets, figure and letter 'or required to take necessary steps under sub-section (4A)' has been inserted.

• By the virtue of this amendment, the Companies have been obligated to ensure that all the necessary steps have been taken to identify the individual who is the Significant Beneficial Owner of the Company and in case of failure to do so, the Company shall be liable for penal provisions.
• Also, the Central government has been empowered to make necessary rules for the purpose of this section.

Section 132 [Constitution of National Financial Reporting Authority (NFRA)]

Notified w.e.f. 15.08.2019

(1) The Central Government may, by notification, constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing standards under this Act.

(2) Notwithstanding..........as may be prescribed.

(3) The National..........such appointment.

(4) Notwithstanding .........Authority shall-

(a) have the power............the Chartered Accountants Act, 1949:

Provided that ................. under this section;

(b) have the same powers ............, namely:-

(i) discovery and production .................by the National Financial Reporting Authority;

(ii) summoning .............them on oath;

(iii) inspection .............at any place;

(iv) issuing ..................documents;

(c) where professional or other misconduct is proved, have the power to make order for-

(A) imposing penalty of-

(I) not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and

(II) not less five lakh rupees, but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

Explanation.- For the purposes of his sub-section, the expression 'professional or other misconduct' shall have the same meaning assigned to it under section 22 of the Chartered Accountants Act, 1949.

In section 132 of the principal Act,-

(a) after sub-section (1), the following sub-section has been inserted, namely:-

'(1A) The National Financial Reporting Authority shall perform its functions through such divisions as may be prescribed.';

(b) after sub-section (3), the following sub-sections have been inserted, namely:-

'(3A) Each division of the National Financial Reporting Authority shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson.

(3B) There shall be an executive body of the National Financial Reporting Authority consisting of the Chairperson and full-time Members of such Authority for efficient discharge of its functions under sub-section (2) [other than clause (a)] and sub-section (4).';

(c) in sub-section (4), in clause (c), for sub-clause (B), the following sub-clause has been substituted, namely:-

'(B) debarring the member or the firm from-

I. being appointed as an auditor or internal auditor or undertaking

any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or

II. performing any valuation as provided under section 247,

for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.'.

• The National Financial Reporting Authority (NFRA) has been authorized to perform its functions through the divisions as prescribed by the Central Government, and each division shall be presided over by the Chairperson or a full-time Member authorised by the Chairperson.
• Also, an Executive Body of NFRA would be set up for efficient discharge of its functions, consisting of the Chairperson and full-time Members.
• Earlier, in case of professional or other misconduct, NFRA was empowered to debar the Chartered Accountant Member, or Firm from engaging in practice as member of the Institute of Chartered Accountant of India (ICAI), however, by the virtue of this amendment, now the Chartered Accountant Member, or Firm can be debarred from being appointed as an auditor or internal auditor, etc. of any Company of body corporate or performing any valuation under section 247 of the Act, for a minimum period of 6 months and maximum period of 10 years, as determined by NFRA.

Section 135 (Corporate Social Responsibility)

Not yet notified

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation.- For the purposes of this section 'net profit' shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.

In section 135 of the principal Act,-

(a) in sub-section (5), -

(i) after the words 'three immediately preceding financial years,', the words 'or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,' has been inserted;

(ii) in the second proviso, after the words 'reasons for not spending the

amount' occurring at the end, the words, brackets, figure and letters 'and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year' have been inserted;

(b) after sub-section (5), the following sub-sections have been inserted, namely:-

'(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

(7) If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

(8) The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.'.

By the virtue of this amendment, the following changes have been made:-

• In case of newly incorporated Companies, the net profit to be spent for Corporate Social Responsibility (CSR) activities, shall be determined for the financial years for which the Companies have been in existence, instead of 3 immediately preceding financial years.
• Earlier, in case Companies were unable to spend the money on CSR activities, they were simply required to specify the reasons for not spending the money, in its Board Report. However, by this amendment, unless the unspent amount relates to any ongoing project, such amount is to be transferred to any Fund specified under Schedule VII of the Act, within 6 months of the expiry of financial year.
• Whereas, the unspent amount which relates to any ongoing project, shall now be transferred by the Company, within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the 'Unspent Corporate Social Responsibility Account' and such amount shall be spent by the Company for the activities specified under CSR Policy of the Company, within a period of 3 financial years from the date of such transfer, otherwise, within 30 days from the expiry of third financial year, such amount shall be transferred to the Fund specified under Schedule VII of the Act.
• In case of failure to comply with the aforesaid provisions, Penal provisions shall be imposed on the Company as specified through this amendment.
• Also, the Central government has been empowered to give general or special directions for Companies or class of Companies to ensure the compliance of this Section.

Section 212 (Investigation into affairs of Company by Serious Fraud Investigation Office)

Notified w.e.f. 15.08.2019

(8) If the Director, Additional Director or Assistant Director of Serious Fraud Investigation Office authorised in this behalf by the Central Government by general or special order, has on the basis of material in his possession reason to believe (the reason for such belief to be recorded in writing) that any person has been guilty of any offence punishable under sections referred to in sub-section (6), he may arrest such person and shall, as soon as may be, inform him of the grounds for such arrest.

(9) The Director, Additional Director or Assistant Director of Serious Fraud Investigation Office shall, immediately after arrest of such person under sub-section (8), forward a copy of the order, along with the material in his possession, referred to in that sub-section, to the Serious Fraud Investigation Office in a sealed envelope, in such manner as may be prescribed and the Serious Fraud Investigation Office shall keep such order and material for such period as may be prescribed.

(10) Every person arrested under sub-section (8) shall within twenty-four hours, be taken to a Judicial Magistrate or a Metropolitan Magistrate, as the case may be, having jurisdiction:

Provided that the period of twenty-four hours shall exclude the time necessary for the journey from the place of arrest to the Magistrate';s court.

In section 212 of the principal Act,-

(a) in sub-section (8), for the words 'If the Director, Additional Director or Assistant Director', the words 'If any officer not below the rank of Assistant Director' have been substituted;

(b) in sub-section (9), for the portion beginning with the words 'The Director' and ending with the word, brackets and figure 'sub-section (8)', the words, brackets and figure 'The officer authorised under sub-section (8) shall, immediately after arrest of such person under such sub-section' have been substituted;

(c) in sub-section (10),-

(i) for the words 'Judicial Magistrate', the words 'Special Court or Judicial Magistrate' have been substituted;

(ii) in the proviso, for the words 'Magistrate';s court', the words 'Special Court or Magistrate';s court' have been substituted;

(d) after sub-section (14), the following sub-section has been inserted, namely:-

'(14A) Where the report under sub-section (11) or sub-section (12) states that fraud has taken place in a company and due to such fraud any director, key managerial personnel, other officer of the company or any other person or entity, has taken undue advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central Government may file an application before the Tribunal for appropriate orders with regard to disgorgement of such asset, property or cash and also for holding such director, key managerial personnel, other officer or any other person liable personally without any limitation of liability.'.

The following amendments have been made:-

• Earlier, only Director, Additional Director or Assistant Director of Serious Fraud Investigation Office, if so authorized, were empowered to arrest a person proved guilty under this Section. However, with this amendment, any officer not below the rank of Assistant Director, if so authorized, may arrest any person in accordance with the provisions of this section.
• In addition to the Judicial Magistrate, the person so arrested, can also now be taken to a Special Court, within 24 hours of his arrest.
• Where an investigation report submitted by SFIO states that a fraud has taken place and any director, KMP or officer has taken undue advantage or benefit, then the Central Government may file an application before the Tribunal with regard to disgorgement and such director, KMP or officer may be held personally liable without any limitation of liability.

Section 241 (Application to Tribunal for relief in cases of oppression, etc.)

Notified w.e.f. 15.08.2019

New provisions inserted

In section 241 of the principal Act,-

(a) in sub-section (2), the following proviso has been inserted, namely:-

'Provided that the applications under this sub-section, in respect of such company or class of companies, as may be prescribed, shall be made before the Principal Bench of the Tribunal which shall be dealt with by such Bench.';

(b) after sub-section (2), the following sub-sections have been inserted, namely:-

'(3) Where in the opinion of the Central Government there exist circumstances suggesting that- -

(a) any person concerned in the conduct and management of the affairs of a company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust;

(b) the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices;

(c) a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other

person or otherwise for a fraudulent or unlawful purpose or in a manner

prejudicial to public interest, the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

(4) The person against whom a case is referred to the Tribunal under sub-section (3), shall be joined as a respondent to the application.

(5) Every application under sub-section (3)-

(a) shall contain a concise statement of such circumstances and materials as the Central Government may consider necessary for the purposes of the inquiry; and

(b) shall be signed and verified in the manner laid down in the Code of Civil Procedure, 1908, for the signature and verification of a plaint in a suit by the Central Government.'.

The following amendments have been made:-

• As per the existing provisions, if the Central Government is of the opinion that the affairs of a Company or class of Companies are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order under this Chapter and as per the amendment, it has been specified that the said application shall be made before the Principal Bench of the Tribunal which shall then be dealt with by such Bench.
• In certain matters in which the persons conducting or managing the affairs of the Company or the manner in which they do so, causes fraud, misfeasance, injury to the interest of trade, industry or business, etc., the Central Government may refer the matter and request the Tribunal to inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of the company.

Section 242 (Powers of Tribunal)

Notified w.e.f. 15.08.2019

New provisions inserted

In section 242 of the principal Act, after sub-section (4), the following sub-section has been inserted, namely:- -

'(4A) At the conclusion of the hearing of the case in respect of sub-section (3) of section 241, the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.'.

By the virtue of this amendment, it has been clearly specified that, while disposing the application made to the Tribunal under section 241 of the Act (as discussed above), at the conclusion of the hearing, the Tribunal shall record its decision stating therein specifically as to whether or not the respondent is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.'.

This simply implies that the Government does not want the Companies to be run or managed by Unfit and improper persons.

Section 243 (Consequence of termination or modification of certain agreements)

Notified w.e.f. 15.08.2019

New provisions inserted

In section 243 of the principal Act,-

(a) after sub-section (1), the following sub-sections have been inserted, namely:-

'(1A) The person who is not a fit and proper person pursuant to sub-section (4A) of section 242 shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision:

Provided that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

(1B) Notwithstanding anything contained in any other provision of this Act, or any other law for the time being in force, or any contract, memorandum or articles, on the removal of a person from the office of a director or any other office connected with the conduct and management of the affairs of the company, that person shall not be entitled to, or be paid, any compensation for the loss or termination of office.';

(b) in sub-section (2), after the word, brackets and figure 'sub-section (1)', the words, brackets, figure and letter 'or sub-section (1A)' have been inserted.

By the virtue of this amendment, following provisions have been introduced:-

• The person who is not a fit and proper person pursuant to section 242 of the Act (as discussed above) shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the decision of the Tribunal.
• Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.
• The person so removed from the office of a director or any other office connected with the conduct and management of the affairs of the company shall not be entitled to, or be paid, any compensation for the loss or termination of office.

Section 272 (Petition for winding up)

Notified w.e.f. 15.08.2019

(3) The Registrar shall be entitled to present a petition for winding up under section 271, except on the grounds specified in clause (a) or clause (e) of that sub-section:

Provided that the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition:

Provided further that the Central Government shall not accord its sanction unless the company has been given a reasonable opportunity of making representations.

In section 272 of the principal Act, in sub-section (3), for the words, brackets and letter 'or clause (e) of that sub-section', the words 'of that section' have been substituted.

As per the earlier provisions, the Registrar was authorized to present a petition for winding up of a Company on the ground as specified under Section 271, except for the grounds where the Company itself has passed a special resolution for winding up OR it is a just and equitable ground for winding up the Company.

However, by the virtue of this amendment, the Registrar can now present a petition to the Tribunal for winding up of a Company, if it is just and equitable to do so.

Section 398 (Provisions relating to filing of applications, documents, inspection, etc., in electronic form)

Notified w.e.f. 15.08.2019

(1) Notwithstanding anything to the contrary contained in this Act, and without prejudice to the provisions contained in section 6 of the Information Technology Act, 2000, the Central Government may make rules so as to require from such date as may be prescribed in the rules that-

(a) such applications,............., as may be prescribed.

(b) such document, ........., as may be prescribed.

(c) such applications, ........., as may be prescribed.

(d) such inspection ............ as may be prescribed.

(e) such fees .......... as may be prescribe; and

(f) the Registrar shall register change of registered office, alteration of memorandum or articles, prospectus, issue certificate of incorporation, register such document, issue such certificate, record the notice, receive such communication as may be required to be registered or issued or recorded or received, as the case may be, under this Act or the rules made thereunder or perform duties or discharge functions or exercise powers under this Act or the rules made thereunder or do any act which is by this Act directed to be performed or discharged or exercised or done by the Registrar in the electronic form in such manner as may be prescribed.

Explanation.- For the removal of doubts, it is hereby clarified that the rules made under this section shall not relate to imposition of fines or other pecuniary penalties or demand or payment of fees or contravention of any of the provisions of this Act or punishment therefore.

In section 398 of the principal Act, in sub-section (1), in clause (f), the word 'prospectus,' has been omitted.

As per this amendment, the prospectus is no longer required to be registered with the Registrar. This amendment is in line with the amendments made by the new Act, in section 26 of the Principal Act (as discussed at point no. 1)