The Companies (Second Amendment) Ordinance, 2019

The Companies (Second Amendment) Ordinance, 2019 was introduced as a replacement of the 2018 Ordinance. It has been formed on the basis of the recommendations of the Committee so as to fill crucial gaps in the corporate governance and compliance framework as enshrined in the Companies Act while extending greater Ease of Doing Business to law-abiding corporates. Prior to its promulgation on February 21, 2019, two similar ordinances were enacted. This particular Ordinance with added provisions is considered to be effective from the date of release of the first Ordinance, i.e. November 2, 2018.

Key features
Below mentioned are the key features for the Companies Ordinance, 2019

1. Re-categorization of certain offences
   The 2013 Act contains 81 compoundable offences punishable with fine or fine or imprisonment, or both. These offences are heard by courts. The Ordinance re-categorizes 16 of these offences as civil defaults, where adjudicating officers (appointed by the central government) may now levy penalties. These offences include issuance of shares at a discount and failure to file annual return.

2. Commencement of business
   The Ordinance states that a company may not commence business, unless it files a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of the company has paid the value of shares agreed to be taken by him, and files a verification of its registered office address with the Registrar of Companies within 30 days of incorporation.  If a company fails to comply with these provisions and is found not to be carrying out any business, the name of the Company may be removed from the Register of Companies.

3. Registration of charges
   The Act requires companies to register charges (such as mortgages) on their property within 30 days of creation of charge. The Registrar may permit the registration within 300 days of creation.  If the registration is not completed within 300 days, the company is required to seek extension of time from the central government.

4. Issue of shares at a discount
   The Act prohibits a company from issuing shares at a discount, except in certain cases.  On failure to comply, the company is liable to pay a fine between INR 1 Lakh and INR 5 Lakh every officer in default may be punished with imprisonment up to 6 months or fine between INR 1 Lakh and INR 5 Lakh. The Ordinance changes this to remove imprisonment for officers as a punishment. Further, the company and every officer in default will be liable to pay a penalty equal to the amount raised by the issue of shares at a discount or INR 5 Lakh, whichever is lower. The company will also be liable to refund the money received with interest at 12% per annum from the date of issue of the shares.

5. Change in approving authority
   Under the Act, change in period of financial year for a company associated with a foreign company, has to be approved by the National Company Law Tribunal.  Similarly, any alteration in the incorporation document of a public company which has the effect of converting it to a private company has to be approved by the Tribunal.  Under the Ordinance, these powers have been transferred to central government.

6. Declaration of beneficial ownership
   If a person holds beneficial interest of at least 25% shares in a company or exercises significant influence or control over the company, he is required to make a declaration of his interest. Under the Act, failure to declare this interest is punishable with a fine between INR 1 Lakh and INR 10 Lakh, along with a continuing fine for every day of default. The Ordinance provides that such person may either be fined, or imprisoned for up to one year, or both.

7. Compounding
   Under the Act, a regional director can compound offences with a penalty of up to five lakh rupees.  The Ordinance increases this ceiling to INR 25 lakh.

The Ordinance changes this to permit registration of charges within 300 days if the charge is created before the Ordinance or within 60 days if the charge is created after the Ordinance. If the charge under the first category is not registered within 300 days, it must be completed within six months from the date of the Ordinance.  If the charge under the second category is not registered within 60 days, the registrar may grant another 60 days for registration.

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