This article has been written by Mr. Yuvraj Singh Rathore, a penultimate student of BBA LLB (H.) at ICFAI Law School, The ICFAI University, Jaipur.

Abstract

The Companies Act serves as the backbone of corporate governance and regulation, ensuring transparency, accountability, and fair practices within the corporate sector. Over the time, amendments to the Companies Act reflect the evolving needs of the business landscape, addressing emerging challenges and fostering growth. Recent changes to the Companies Act have brought significant implications for businesses, investors, and stakeholders alike. The corporate spectrum is changing rapidly so much so that there are several Companies Acts have been enacted and so many amendments have been made in apropos thereof over one and half centuries, which are even hard to trace presently. This article is an attempt to locate the path of company law’s evolution via the chronicles of enactment of Acts & Amendments. Predominantly, this article will focus on the changes and impacts arising out of the recent amendments in the Companies Act 2013. 

Introduction

Axiom that “Change is the element which protects everything from getting erode to the sand by the ravages of time.” 

Company laws subsumed the laws, rules, regulations, procedures, norms, etc. set up for regulating and governing the working and conduct of a company. The company laws are having very vast spectrum keeping a wide opening for amelioration. In the wake of past occasions, it is evident that people have benefited subtly because of the loopholes in the company laws. To overcome such loopholes, now and then, new legislations and amendments thereof were brought by the concerning authorities. These amendments have played a pivotal role in the odyssey of company laws. The department, that looks over the companies in India, is the Ministry of Corporate Affairs (“MCA”), and the Companies Act, 2013 (“Act 2013”) is the statute which governs the companies over here.   

Historical Background

With the advent of the East India Company, the concept of the company came into existence hither, and to regulate the companies over here, the Joint Stock Companies Act, 1850 was enacted at the very outset, which was thoroughly influenced by English Companies Act, 1844. As witnessed by history, the company laws were always subject to the frequent amendments and enactments of Acts in the place of the former one. The Companies Act, 1956 is a significant nexus of Company laws history, as it used to govern the companies from the Independence to the year 2013, when Act 2013 came into force. The Act 2013 brought manifold concepts along with the amelioration in the former provisions of the Companies Act, 1956, for instance, the concept of Corporate Social Responsibility (CSR), Woman Director, Class Action Suits, Key Managerial Personnel (KMP), Entrenchment clause in Articles of Association. It also inset new types of companies, such as One Person Company, Small Company, Dormant Company and Associate Company. The Act 2013 has also defined the term ‘Fraud’ in the explanation attached to Sec. 447 and ‘Promoter’ in Sec. 2(69) of it.[1]

There are 4 amendments (& 2 ordinances) so far in the current Act 2013 which is discussed at length infra under the specific head. Moreover, it has also been amended by virtue of the Insolvency and Bankruptcy Code, 2016, and the Finance Act, 2017, and amendments thereof.

Amendments in the Act 2013

The Act 2013 has undergone 4 major amendments (& 2 ordinances) so far, which are as follows:-

1. Companies (Amendment) Act, 2020

It has brought the following major changes-

• With this amendment, the fine is substituted with the penalty in some provisions, and the amount payable as the penalty across the board is also reduced. In certain petty omissions, penal ramification has also been omitted. For several offences, imprisonment is removed, subjecting them to the fine alone. Offences were also re-categorized thereby.[2]
• Provisions were inserted in order to enable public companies to list their securities in foreign jurisdictions.[3]
• Sec. 135(9) was inserted, whereby, the company won’t need to form a Corporate Social Responsibility (“CSR”) Committee, in case where the CSR obligation of the company is less than 50 lakh rupees and the function of the committee will be discharged by the Board of Directors. Sec. 137(7) was also substituted, which provides the penalty on account of the default in fulfilling the CSR obligations by the company. It was also inserted thereby that if a company pays off more amount than the amount payable under CSR obligation, then the company will be entitled to set off the excessive amount against the requirement to spend under the CSR in the succeeding financial year.[4]   
• A whole Chapter is inserted, viz. Chapter XXIA, in Act 2013, having Sec. 378A to 378ZU in respect to the Producer Companies.[5]   
• Reduced the pecuniary penalty to be imposed on the start-up company, Producer Company, One Person Company, or small company on noncompliance of provisions of the Act 2013.[6]

1. Companies (Amendment) Act, 2019

It has brought the following major changes-

• Sec. 11 of the Act 2013 was in respect to Commencement of business, etc, which was earlier omitted from the Act vide Companies (Amendment) Act, 2015, is inserted again therein mutatis mutandis, as Sec. 10A.[7] 

• Lessen the burden of NCLT by transferring certain approvals, to the Central Government under Sec. 14 of the Act 2013.[8]
• In several provisions ‘liable to penalty’ was substituted with ‘fine’ which resultantly reduced the mounting work pressure on NCLT as the penalty can also be imposed by the Registrar of Companies (RoC) and Regional Director (RD) after issuing show cause notice (SCN), whereas, fine is required to be imposed by Judicial body i.e. NCLT & NCLAT here.[9]

1. Companies (Amendment) Ordinance, 2018 & Companies (Amendment) Second Ordinance, 2019

It was an ordinance passed in November 2018, which was replaced thereafter with the Companies (Amendment) Second Ordinance, 2019. Suffice it to say that the Companies (Amendment) Second Ordinance, 2019 has also been repealed vide Sec. 44 of the Companies (Amendment) Act, 2019.[10]

1. Companies (Amendment) Act, 2017

It has brought the following major changes-

• The relationship between the Subsidiary Company and Holding Company described in Sec. 2(87) of the Act 2013, where ‘Total share capital’ is substituted by ‘Total voting power’. [11]
• The definition of Key Managerial Personnel, provided u/s 2(51) of the Act 2013, was broadened with the insertion of sub-clauses ‘v’ & ‘vi’, whereby, an officer, who is not more than one level below the directors and who is in whole-time employment or the officer as may be prescribed, will be eligible to be a key managerial personnel. [12] 
• Sec. 3A was inserted in Act 2013, whereby, members can become severally liable in certain cases. [13] 
• A term ‘identified persons’ was added in Sec. 42 of the Act 2013 for the select group of persons who have been identified by the Board to whom the private placement will going to be offered. [14]
• A new provision is inserted in Sec. 53 of the Act 2013, whereby, the company is free to issue shares at discount to its creditors when its debt is converted into shares in accordance with any guidelines or directions of RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949. [15]
• Whole Sec. 90, that was in apropos to ‘Investigation of beneficial ownership of shares in certain cases’ erstwhile, was substituted with the provisions pertaining to the Registration of significant beneficial owners in a company. [16]
• The words ‘any financial year’ were replaced with ‘immediate preceding financial year’ Sec. 135 which talks about the CSR of a company , whereby, only immediate preceding financial year will be assessed in order to check the CSR obligation of a company. Furthermore, the company won’t require an independent director therefor, the Company shall have two or more directors in its CSR Committee. [17]

1. Companies (Amendment) Act, 2015

It has brought the following major changes-

• The requirement of ‘Common Seal’ in a company for registration, u/s 9 of the Act 2013, has been removed and Sec. of 12, 22 & 47 also changed accordingly, whilst, repealing mandatoriness of common seal thereto. [18]
• A penal provision was inserted as Sec. 76A providing punishment for contravention of Sec. 73 & 76 of the Act 2013.[19]
• A proviso was inserted u/s 123 of the Act 2013, refraining the companies from declaring dividends before setting off the carried-over previous year’s losses and depreciation against profit of the current year.[20]
• Sec. 143(12) was substituted, whereby, frauds, to be reported, were stratified among two categories i.e. when the amount of fraud is being posited to be Rs. 1 crore or more, then the fraud shall be reported to Central Government by Auditor and in case, when the amount is lower, it shall be intimated to Audit Committee.[21]

Future Prospect & Scope

With the evolving phase of the contemporary world, more amendments are likely to take place. Some of the areas, where these upcoming amendments can be focused upon, are-

1. Corporate Governance: Amendments may focus on enhancing transparency, accountability, and integrity in corporate governance structures. This could involve changes in board composition, roles and responsibilities of directors, and disclosure requirements.
2. Sustainability and Environmental Compliance: Companies Acts may incorporate provisions related to environmental sustainability, requiring companies to disclose their environmental impact and adopt sustainable business practices.
3. Shareholder Rights: Amendments could aim to strengthen shareholder rights, including provisions for proxy voting, shareholder activism, and mechanisms for minority shareholder protection.
4. Digitalization and Technology: With the increasing role of technology in business operations, amendments may address issues related to electronic communication, digital signatures, and electronic record-keeping.
5. Insolvency and Bankruptcy: Changes in insolvency laws may be made to streamline the insolvency process, protect the rights of creditors and debtors, and promote the efficient resolution of financial distress.
6. Compliance and Regulatory Framework: Companies Acts may be amended to align with international standards and best practices, as well as to address emerging regulatory challenges in areas such as data privacy, cyber security, and anti-money laundering.
7. Small Business Support: Amendments may include provisions aimed at reducing regulatory burdens on small and medium-sized enterprises (SMEs), promoting entrepreneurship, and facilitating access to finance and markets.
8. Corporate Social Responsibility (CSR): Companies Acts may require companies to disclose their CSR activities and expenditures, and encourage firms to integrate social and environmental concerns into their business operations.
9. Cross-Border Transactions: Amendments may address issues related to cross-border mergers and acquisitions, foreign investment, and international tax compliance.
10. Enforcement and Penalties: Changes in enforcement mechanisms and penalties for non-compliance may be introduced to ensure greater adherence to regulatory requirements and deter corporate misconduct.

Conclusion

The journey of the Companies Act reflects the dynamic nature of corporate governance and regulation, constantly evolving to meet the demands of a changing business landscape. The recent amendments to the Companies Act, particularly the Companies Act of 2013, have ushered in significant transformations, addressing emerging challenges and fostering a culture of transparency, accountability, and compliance within the corporate sector.

The amendments have touched upon various facets of corporate governance, from redefining the scope of corporate social responsibility to streamlining compliance requirements for different categories of companies. They have also sought to enhance the ease of doing business by simplifying procedures and reducing regulatory burdens, especially for small and medium-sized enterprises.

Looking ahead, the future prospect of amendments to the Companies Act is promising. There is a growing emphasis on sustainability, environmental compliance, and shareholder rights, reflecting broader societal and regulatory trends. Additionally, the advent of digitalization and technology is expected to reshape corporate practices, necessitating reforms in areas such as electronic communication and data privacy.

Furthermore, amendments may focus on strengthening insolvency and bankruptcy laws, facilitating cross-border transactions, and bolstering enforcement mechanisms to ensure greater adherence to regulatory requirements. The overarching goal remains to foster a conducive environment for business growth while upholding ethical standards and safeguarding the interests of stakeholders.

Reference

[1] Data of Institute of Company Secretaries of India, available at https://www.icsi.edu/ 

[2] Ibid

[3] S.5 of Companies (Amendment) Act, 2020

[4] S. 27, Ibid

[5] S. 52, Ibid

[6] S. 62, Ibid

[7] S. 3 of the Companies (Amendment) Act, 2019

[8] S. 5, Ibid

[9] see supra 1

[10] Jha, C. V. (2019, November 8). 2019 companies (amendment) ordinance by Ministry of Law & Justice. SAG Infotech Official Blog. https://blog.saginfotech.com/companies-amendment-ordinance-2019#  

[11] S. 2 of the Companies (Amendment) Act, 2017

[12] S. 2(vii), Ibid

[13] S. 3, Ibid

[14] S. 10, Ibid

[15] S. 12(ii), Ibid

[16] S. 22, Ibid

[17] S. 37, Ibid

[18] S. 3, 5, 6 & 7 of the Companies (Amendment) Act, 2015 respectively

[19] S. 8, Ibid

[20] S. 10, Ibid

[21] S.13, Ibid; Rule 13 of companies (audit and auditors) rules 2014; & Circular no. NF-25013/2/2023 dated 26.06.2023 of National Financial Reporting Authority, Govt. of India