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Lok Sabha Passes Companies Amendment Bill, Centre Tightens Noose Around CSR Spending & Shell Companies

Finance and Corporate Affairs Minister Nirmala Sitharaman said the draft law will also ensure more accountability and better enforcement to strengthen the corporate governance norms.


Updated:July 26, 2019, 6:09 PM IST
Lok Sabha Passes Companies Amendment Bill, Centre Tightens Noose Around CSR Spending & Shell Companies
File photo of Finance Minister Nirmala Sitharaman.

New Delhi: Amid opposition from the Congress, Lok Sabha on Friday gave its nod to the Companies (Amendment) Bill which seeks to tighten corporate social responsibility compliance and reduce a load of cases on the National Company Law Tribunal (NCLT).

Finance and Corporate Affairs Minister Nirmala Sitharaman said the draft law will also ensure more accountability and better enforcement to strengthen the corporate governance norms.

Explaining the purpose of the bill, Sitharaman tweeted, “four lakh shell companies have been identified and deregistered in the last five years.”

The bill proposes that companies will be given a three-year window in which they will have to steadily start spending their CSR money for their chosen CSR project and give a picture of where the money was spent in those three years.

However, in case it doesn’t happen, they will have to move the money in an escrow account. If the company has not even thought of where to spend the money, it will go to a common account.

Apart from this, the key amendments in the bill include:

Allowing subsidiaries of foreign companies to follow different financial year for accounting

The bill proposes to add a proviso to Section 2 to permit companies which are subsidiaries or associates of foreign companies which follow a different financial year for accounting outside India to follow any period as its financial year.

Modification of punishment of fine

Sixteen sections of the Act are proposed to be amended so as to modify the punishment as provided in the said sections from fine to monetary penalties to lessen the burden upon the Special Courts.

Provisions to deal with unspent CSR amount

amendments are proposed to Section 135 to carry forward the unspent corporate social responsibility amount, to a special account to be spent within three financial years and transfer thereafter to the fund specified in Schedule VII, such as PM's National Relief Fund.

Debarring of erring auditors

The bill provides for the punishment for debarment from appointment as an auditor or internal auditor of a company, or performing a company's valuation, for a period between six months to 10 years in case of proven misconduct.

Provisions to deal with persons 'unfit and improper' to manage companies

The amendment proposed to Section 241 empowers the central government to move a matter before the NCLT against managerial personnel on several grounds such as:

(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 In such cases, the Central Government may refer the matter and request to the Tribunal to inquire into the case and record a decision about whether the 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.

Expanding the power to compound offences

The pecuniary limits of Regional Director ("RD") to compound offences under section 441 of the Act is proposed to be increased. The threshold is proposed to be increased to fine up to R. 25 lakhs.

Disqualification of director

A new clause has been inserted under the Section 164 to state that violation of Section 165(1) shall be a ground for disqualification of a director, if he/ she breaches the limits of maximum directorship allowed thereunder.

Opposing the ordinance brought earlier, Adhir Ranjan Chowdhury (Cong) and Saugata Roy (TMC) said it was not required as the law has been amended on several occasions.

Pinaki Misra (BJD) described the bill as "disastrous", saying the legislation has been drafted by bureaucrats and the lawmakers have just rubberstamped it.

A Raja (DMK) said the registrar of companies has been given "excessive powers" which is not good. P P Chaudhury (BJP) said once the law is amended, it will help in ease of doing business and give a boost to commerce.

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