The Companies (Amendment) Act, 2019 Introduced in India: Mandatory CSR among New Provisions

The Companies (Amendment) Act, 2019 (the Act) came into effect July 31, 2019 and replaced the Companies (Amendment) Second Ordinance, 2019 with certain additional amendments.

The Act will significantly affect corporate compliances and litigation in India.

Companies operating in the country or planning to set up should pay close attention to the changes to understand legal implications as well as to ensure the smooth running of their business in India.

Below, we highlight some of the key provisions of the Act.

CSR is now mandatory and unspent amount to go to PM’s funds

A major focus of the amended Act is on corporate social responsibility (CSR) spending.

The Act mandates that companies with a profit of more than INR 5 crore (US $700,675), turnover of INR 100 crore (US $14 million), and net worth of more than INR 500 crore (US $70 million) have to spend at least two percent of their three years’ annual average net profit towards CSR activities.

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Further, companies are now obliged to transfer their unspent CSR funds to one of the funds prescribed under Schedule VII of the Act (such as the Prime Minister Relief Fund) within six months of the end of the financial year and disclose the reasons for non-spending in their annual report.

If the CSR funds are committed to certain ongoing projects, the company must transfer the amount to an unspent account with a scheduled bank within 30 days from the end of the financial year. From here, the amount must be utilized for those projects within three years. If the company fails to spend this amount, it must transfer it to one of the funds mentioned in Schedule VII of the Act.

In case of any violation of the CSR provisions, the company is liable to a minimum penalty fee of INR 50,000 (US$700), which may extend to INR 25 lakh (US$35,034). Further, every defaulting officer of the company may be liable to imprisonment for up to three years, or a fine up to INR 5 lakh (US $7,023), or both.

These changes effectively make CSR contribution mandatory for companies operating in India.

Re-categorization of certain offences

The Act has brought about 16 corporate offences under the ambit of civil liability, including failure to file annual returns and financial statements within a specified time frame, and issuance of shares at a discount. These offences, which earlier attracted criminal proceedings against the offender, are now liable for a penalty.

While this provision will raise the monetary burden on companies, the offenders will not have to face judicial prosecution.

Commencement of business

The Act requires companies to file a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of Association (MoA) of the company has paid for the shares agreed to be taken by them.

The companies must also file documents stipulating the verification of their registered address with the Registrar of Companies (ROC) within 30 days of incorporation. The Act empowers the RoC to take strict action against companies that fail to comply with these provisions and remove their name from the register of companies.

Unfit persons not to manage companies

If the federal government is of opinion that the affairs of the company are being conducted in a manner that is detrimental to public interest, it may itself apply to the National Company Law Tribunal (NCLT) for an order to prevent mismanagement and oppression in the company.

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Under certain circumstances, the government may also initiative a case against an individual in the company and refer it to the NCLT for inquiries. These circumstances may include among others fraud, misfeasance, persistent negligence, business not conducted with sound business principles or breach of trust.

Associates of foreign companies may follow different financial year for accounting

Previously, the Companies Act required all companies to follow financial year ending on March 31 of every year. It only exempted companies or body corporates holding a company or a subsidiary of a company incorporated outside India to follow a different financial year for consolidation of its accounts outside India. Such companies could apply to the NCLT to allow them a non-March financial year end.

The amendments now extend this exception to associates of a foreign company as well as to a subsidiary of a foreign company that follows a different financial year. Also, the companies can now make the application to the federal government rather than the NCLT – speeding up the time period for processing applications.

Disgorgement of properties in case of corporate fraud

In case of corporate fraud revealed by an investigation by the Serious Fraud Investigation Office (SFIO), the government may make an application to the NCLT to pass appropriate orders for the disgorgement  or giving up of profits or assets of an officer or person or entity, which was obtained an undue benefit.

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