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Amendments to India’s Companies Act in light of the Covid-19 pandemic

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Sanjay Buch
Crawford Bayley & Co, Mumbai
sanjay_buch@crawfordbayley.com

Yashvi Shah
Crawford Bayley & Co, Mumbai
yashvi.shah@crawfordbayley.com

 

Sometime in December 2019, the China Country Office of the World Health Organization (WHO) reported cases of certain pneumonia of unknown aetiology detected in Wuhan City, Hubei Province of China. On 11 February 2020, the WHO named the disease ‘Covid-19’, short for coronavirus disease. The disease was found to be rapidly transmitting among humans. As most countries around the world started reporting cases of Covid-19, multiplying at an alarming rate, on 11 March 2020, the WHO categorised Covid-19 as global ‘pandemic’. The consequences of the Covid-19 outbreak in India are severe.

In the ever-evolving and fast-pace world, the pandemic has forced us to stop and breathe. With the ‘work from home’ culture of employment being implemented by various companies in light of the social distancing norms issued by central and state governments, conventional norms of working have undergone drastic change. The quarantine and social distancing measures have forced many small, medium and large businesses, to suspend operations, causing a substantial commercial impact.

To balance the situation, the Government of India has, through various regulatory authorities/ministries, from time to time, relaxed the compliance burden on companies by providing relaxations/extensions under the laws. The Ministry of Corporate Affairs (MCA) has issued various circulars, notifications and FAQs relaxing compliances under the Companies Act 2013 (the 'Act'), in view of this unprecedented pandemic.

The recent developments in the Companies Act, 2013 regime, due to the Covid-19 pandemic, are outlined below.

Matters to be conducted through video conferencing/other audio-visual means

The MCA instructed Companies (Meetings of Board and its Powers) Amendment Rules 2020 inserting sub-rule (2) which provides that for the period beginning from the commencement of the Companies (Meetings of Board and its Powers) Amendment Rules, 2020 and ending on 30 September 2020, the meetings on matters referred to in sub-rule (1) may be held through videoconferencing or other audio-visual means in accordance with rule (3). Therefore, meetings for the following matters can be held through video conferencing or other audio-visual means:

  • the approval of the annual financial statements;
  • the approval of the board’s report;
  • the approval of the prospectus;
  • audit committee meetings for consideration of financial statement including consolidated financial statement if any, to be approved by the board under sub-section (1) of section 134 of the Act; and
  • the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

Spending Corporate Social Responsibility (CSR) funds for Covid-19

In its Circular dated 23 March 2020, the MCA clarified that spending of CSR funds for Covid-19 is eligible CSR activity. It further clarified that funds may be spent for various Covid-19-related activities under item Nos (i) to (ix) of Schedule VII relating to promotion of healthcare, including preventive healthcare and sanitation, and disaster management. It further stated that the items should be interpreted liberally for this purpose.

Special Measures under Companies Act 2013 and Limited Liability Partnership Act 2008

In its Circular dated 24 March 2020, the MCA reduced the compliance risk and other burdens on companies and limited liability partnerships by introducing the following measures:

No additional fees

No additional fees shall be charged for late filing during a moratorium period from 1 April to 30 September 2020 in respect of any document, return or statement required to be filed in the MCA21 Registry, irrespective of its due date.

Holding board of directors meetings

The mandatory requirement of holding company board meetings within the intervals (120 days) provided in Section 173 of the Companies Act 2013 is extended by a 60-day period until the next two quarters (ie, 30 September 2020). Accordingly, as a one-time relaxation, the gap between two consecutive board meetings may extend to 180 days until the next two quarters, instead of 120 days.

The Companies (auditor’s report) Order 2020

The Order shall be made applicable from the financial year 2020–2021 instead of being applicable from the financial year 2019–2020 as earlier notified.

Meeting of the independent directors

As per paragraph VII (1) of Schedule IV to the Act, independent directors (IDs) are required to hold at least one meeting without the attendance of non-independent directors and members of management. For the financial year 2019–2020, if the IDs of a company have been unable to hold such a meeting, it shall not be viewed as a violation. The IDs, however, may share their views among themselves through telephone or email or any other means of communication, if they deem it necessary.

Creation of the deposit repayment reserve

The deadline under section 73(2)(c) of the Act to create the deposit repayment reserve of 20 per cent of deposits maturing during the financial year 2020–2021 before 30 April 2020 shall be moved back to 30 September 2020.

Investment or deposit of at least 15 per cent of amount of debentures maturing

The requirement under rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 to invest or deposit at least 15 per cent of amount of debentures maturing in specified methods of investments or deposits before 30 April 2020 has been postponed by six months to 30 September 2020.

Declaration of commencement of business

Newly incorporated companies are required to file a declaration for Commencement of Business within 180 days of incorporation under section 10A of the Act. An additional 180 days has now been allowed for this compliance.

Minimum residency of director

For the financial year 2019-2020, the non-compliance of minimum residency in India for a period of at least 182 days by at least one director of every company, under Section 149 of the Act shall not be treated as non-compliance.

Companies Fresh Start Scheme 2020

The MCA introduced the Companies Fresh Start Scheme in its Circular dated 30 March 2020. It pardons delays in filing of belated annual returns and financial statements, various other statements, documents and returns with the registrar, insofar as it relates to charging of additional fees, and granting of immunity from launching of prosecution or proceedings for imposing penalty on account of delay associated with certain filings. The scheme is in force from 1 April to 30 September 2020.

LLP Settlement Scheme 2020

In its Circular dated 30 March 2020, the MCA modified the LLP (Limited Liability Partnership) Settlement Scheme introduced by its Circular No 06/2020 of 4 March 2020. As per the previous Circular, the Scheme shall come into force with effect from 1 April 2020 and shall remain in force until 30 September 2020. The Scheme provides that any defaulting LLP is permitted to file belated documents which were due to be filed by 31 August, 2020 in accordance with the provisions of the Scheme.

Passing of ordinary and special resolutions

In its Circular dated 8 April 2020, the MCA issued clarifications on the passing of ordinary and special resolutions by companies under the Act and rules made on account of Covid-19. The Circular provides for the procedure with regards to passing of resolutions for all urgent matters, other than the items of ordinary business or business where any person has the right to be heard, through the mechanism of postal ballot/e-voting in accordance with the provisions of the Act and Rules. It further lays out the procedure for holding extraordinary general meetings by any company under unavoidable circumstances on or before 30 June 2020.

In its Circular dated 13 April 2020, the MCA set out the framework for the passing of ordinary and special resolutions under the Companies Act, 2013. This Circular was passed as a clarification to its Circular No 14/2020 of 8 April 2020, consisting of:

  • manner and means of issuing notices to the members before convening the general meeting;
  • requirement for voting by a show of hands;
  • passing of certain items only via postal ballot without convening a general meeting; and
  • sending of emails by members, where a poll on any item is required for companies covered in paragraph 3B of the General Circular No 14/2020 dated 8 April 2020.

Holding of annual general meetings (for year ending 31 December 2019)

In its Circular dated 21 April 2020, the MCA clarified that if the companies whose financial year (other than first financial year) ended on 31 December 2019, hold their AGM for such financial year within a nine-month period of the end of their financial year (ie, by 30 September 2020), it shall not be viewed as a violation.

Holding an annual general meeting

In its Circular dated 5 May 2020, the MCA clarified that companies shall be allowed to conduct their AGM through videoconferencing or other audio-visual means, during the calendar year 2020. It further provides that companies which are not covered by the General Circular No 18/2020 dated 21 April 2020 and are unable to conduct their AGMs in accordance with the framework provided in the Circular are advised to prefer applications for postponement of their AGM to a suitable date before the concerned Registrar of Companies under section 96 the Act.

Dispatch of notice under Section 62(2) of the Act

In its Circular dated 11 May 2020, the MCA has clarified that for rights issues opening up until 31 December 2020, in case of listed companies, which comply with the Securities and Exchange Board of India (SEBI) Circular No SEBI/HO/CFD/DIL2/CIR/P/2020/78 of 6 May 2020, inability to dispatch the notice referred to in Section 62(1)(a)(i) read with Section 62(2) of the Act to the shareholders through registered post, speed post or courier would not be viewed as violation of Section 62(2) of the Act.

Extension for passing ordinary and special resolution

Its Circular dated 15 June 2020, the MCA stated that companies are allowed to conduct their extraordinary general meetings through video conferencing/other audio visual means or transact items via postal ballot in accordance with the framework provided in General Circular No 14/2020 dated 8 April 2020 and General Circular No 17/2020 dated 13 April 2020, until 30 September 2020.

Scheme for relaxation of time for filing forms related to creation or modification of charges under Companies Act 2013

In its Circular dated 17 June 2020, the MCA introduced the ‘scheme for relaxation of time for filing forms related to creation or modification of charges under Companies Act, 2013’. The scheme shall be applicable in respect of Form No CHG-1 and Form No CHG-9, by a company or charge holder, where the date of creation/modification of charge: (a) is before 1 March 2020, but the timeline for filing such form had not expired under Section 77 of the Act as on 1 March 2020; (b) or falls on any date between 1 March and 30 September 2020 (inclusive).

Pursuant to the said scheme, for the situations falling under (a) above, the period beginning from 1 March 2020 and ending on 30 September 2020 shall not be reckoned for the purposes of counting the number of days. For the situations falling under (b), the period beginning from the date of creation/modification of charge until 30 September 2020 shall not be reckoned for the purposes of counting the number of days.

Corporate social responsibility

The MCA’s Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020 inserted a proviso to Rule 2(1)(e) which provides that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to Covid-19 for financial years 2020–2021, 2021–2022 and 2022–2023.

This is subject to the conditions that: such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act; and details of such activity shall be disclosed separately in the annual report on CSR included in the board’s report.

Conclusion

As discussed, the MCA has amended, relaxed and extended various provisions of the Act, so as to facilitate and enable company management to comply with the Act’s provisions in these unprecedented and difficult times. Furthermore, such proactive steps taken fby the MCA have proved beneficial to investors as well as companies. While the MCA has introduced the conduct of board as well as AGMs through electronic communications, it would be safe to assume that conducting meetings via such methods will become the new norm.