Tag Archives: CSR

Highlights of the Companies Amendment Act, 2019

The Ministry of Corporate Affairs has amended the Companies Act 2013 vide the Companies (Amendment) Act, 2019 (the “Amendment Act”) notified on 31 July 2019. The Amendment Act takes into account the amendments that were already notified in the Companies (Amendment) Ordinance, 2018, which came into force on 2 November, 2018.

The major changes under the Amendment Act are broadly aimed at:

  • to improve the existing prosecution system by imposition of stricter penalties, under various sections, on the companies as well as the officers in default. Although this will increase the monetary burden on the company but will gradually help to reduce non-compliances.
  • to re-categorize certain compoundable offences as civil defaults and remove the criminal liability attached to them. The amendment has re-categorized certain penal provisions, where defaults that were punishable with fine/ and imprisonment have been amended to penalty. Now, the offences can be easily adjudicated with the authorities without going into time-consuming application procedures.
  • to transfer some of the approval powers from NCLT to the Central government i.e. ROC to reduce the burden of tribunals.
  • to bring accountability to the CSR activities undertaken by the Companies not only in letter but in spirit too.
  • greater accountability with respect to filing documents related to creation, modification and satisfaction of charges; non-maintenance of registered office to trigger de-registration process; holding of directorships beyond permissible limits to trigger disqualification of such directors, have also been introduced in the Amendment Act. Reforms pertaining to declaration of commencement of business provision.

Key Highlights of the Amendment Act:

Sr. No.

Category Highlights on the amendments
1.

 

Approval for Change in Financial Year

Any company or body corporate which is a holding company or a subsidiary or an associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, may change its financial year with the approval of Central Government.

Prior to amendment, Tribunal’s approval was required.

2. Requirement of obtaining approval for Commencement of Business

Companies incorporated after Amendment Act, shall commence its business or exercise any borrowing powers only after filing a declaration with respect to the receipt of paid up value of the shares from the subscribers to the memorandum and the verification of Registered office within 30 days from the date of incorporation in with the Registrar of Companies. The declaration shall be filed within 180 days from the date of Incorporation.

3. Physical verification of Registered Office of the Company

Pursuant to amendment in Section 12, the Registrar is empowered to do the physical verification of the Registered office of a Company if it has reasonable cause to believe that the company is not carrying on any business or operations also to remove the name of the Company from the register of companies.

4. Approval for conversion of Public Company to Private Limited Company

Erstwhile, the Tribunal had authority approve or reject any alteration in the Articles of the Company relating to conversion of a public company into a private company. Pursuant to this amendment, the Central Government is empowered.

5. Securities to be in Dematerialized Form

A new provision has been inserted to Section 29, whereby securities of certain class or classes of unlisted companies, the securities shall be held or transferred only in dematerialized form in the manner laid down in the Depositories Act, 1996 and the regulations made thereunder.

6. Registration of Charge (due date for filing is reduced)

Section 77 has been amended whereby the extended period of 270 days has been now restricted to 60 days for filing an application to register a charge.

7. Responsibility of Identifying beneficial owner

Sub-section 4A has been inserted whereby every company shall take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of section 90. The introduction of this section brings more clarity for casting duty on company to identify and report on Significant Beneficial Owner to the Registrar. Further, Central Government has been empowered to make rules for the section.

8. Consequence of non-filing of Annual Return

Penalty provisions on non-filing of the annual return within the prescribed timeline have been revised and a further penalty of INR 100 per day on continuing offence subject to a maximum of 5 Lakhs has been imposed.

9. Section 117 (Resolutions and Agreements to be Filed)

The word ‘fine’ has been substituted with the word ‘penalty’ in the penalty provision and an additional penalty on continuing offence of INR 500 per day subject to maximum of INR 5 Lakhs have been imposed.

10. Section 135 (Corporate Social Responsibility)

Clarification has been provided for calculation of profits in case of newly incorporated Company by inserting following words under sub-section 5 “or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years”. On the unspent amount, a provision has been added to transfer the unspent amount to a fund specified under schedule VII within six months from the expiry of financial year has been provided unless it relates to an ongoing project.

In relation to any amount being unspent which relates to an ongoing project shall be transferred to a separate account to be opened by the Company to be called as the Unspent Corporate Social Responsibility Account within a period of 30 days from the end of Financial Year and such amount shall be spent within the period of three financial years from the date of transfer and in case of failure such amount shall be transferred to a fund specified in Schedule VII within 30 days from the date of completion of third financial year.

In case of default, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default, shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”

11. Automatic Vacation in case of Disqualification of Director

A new clause (i) has been inserted under Section 164 as “he has not complied with the provisions of sub-section (1) of section 165” which is one of the grounds of disqualification of a director where, if he/ she breaches the limits of maximum directorship allowed thereunder.

It is to be noted that falling under any of the clauses of Section 164 leads to automatic vacation of office from all the existing companies.

12. Stock options to Independent Director

Provisions pertaining to the prohibition on entitlement of stock option by independent directors. However, this omission shall not have any impact as Section 149 (9) also provides similar prohibition.

Further, the minimum fine of 1 lakh rupees and maximum fine of 5 lakhs rupees have been replaced with a penalty of INR 1 lakh for the defaulting person and in addition where any default has been made by a company, the company shall be liable to a penalty of five lakh rupees.

13. Oppression & Mismanagement

There is an insertion of 3 new sub-sections to the Section, where for the purpose of class of companies as may be prescribed the matter shall only be made before principal bench of the Tribunal and if in the opinion of Central government there exists circumstances as mentioned under sub section 3 clause (a) (b) (c) and (d), the Central Government may initiate a case against such person and refer the same to the Tribunal with a request that the Tribunal may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of a director or any other office connected with the conduct and management of the company.

14. Powers of Tribunal in case of Oppression & Mismanagement

A new sub-section (4A) has been inserted to cast responsibility on the tribunal to record its decision at the conclusion of hearing case in respect of sub-section (3) of section 241, specifically as to whether or not the respondent 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.

15. Section 243 (Consequence of termination or modification of certain agreements)

New Sub-sections (1A) and (1B) to the section has been inserted whereby in case a person is declared as not a fit or proper person pursuant to section 242(4A) under the case of oppression and mis-management, shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision provided that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

Further, according to Section 243(1B), any person on being removed as Director or any other office connected with the conduct and management of affairs of the company, shall not be entitled to, or be paid, any compensation for the loss or termination of office.

16. Petition for winding up by Registrar

There is an amendment in sub-section (3) which enables the Registrar to present a petition for winding up under section 271 with the only exception mentioned in clause of Section 271 which talks about the situation where if the company has, by special resolution, resolved that the company be wound up by the Tribunal the Registrar may not present such petition.

17. Compounding of offences

The amendment has increased the limit of offence for compounding before the Regional Director from 5 Lakh rupees to 25 Lakh rupees in 441(1)(b). Further, it has been clarified in sub-section (6), that any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable.

18. Penalty for repeated default

New Section 454A has been inserted which talks about the penalty of repeated default. In this section a company or an officer of a company or any other person shall be liable to the twice the amount of penalty, who had already been subjected to the penalty under the Act. However, the subsequent default has to be repeated within 3 years from the date of order imposing penalty for earlier default.

Corporate Social Responsibility (CSR) Contributions in Incubators

Every company having a net worth of INR 500 crore or more, or turnover of INR 1000 crore or more or a net profit of INR  5 crore or more during the immediately preceding financial year is subject to the provisions related to Corporate Social Responsibility (“CSR”) under the Companies Act, 2013 (the “Act“). The CSR related provisions of the Act are applicable to not just companies incorporated in India, but also to a foreign company that has its branch or project office in India. For a deep dive on the general conditions attached to CSR, and how to structure your CSR activities please refer to our previous post here. In this post, we will focus on the various ways CSR can be taken by incubators.

CSR in Technology Business Incubators located within Academic Institutions:

The most straight forward way is through grants given to government recognised Technology Incubators. Under entry (ix) of Schedule VII of the Companies Act, 2013, a company is allowed to undertake activity under their CSR Policy for “contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt”.

The process for obtaining approval of the Central Government as Technology Business Incubators (TBI) is captured in brief below:

  • A Host Institute (HI) which is generally an Academic/Technical/R&D Institution or other institutions with proven track record in promotion of technology-based entrepreneurship, is required to submit a proposal to National Science and Technology Entrepreneurship Development Board of the Department of Science and Technology (DST).
  • If the HI is not an academic institution, then it should be a legal entity registered in India with clear purpose of promoting research, innovation and entrepreneurial ecosystem. It is desirable to have partnership with at least one academic institute of repute.
  • Financial support for establishing a TBI is also extended to a not-for-profit legal entity registered as a trust/society/section 8 company. For-profit incubators are not given financial support by the DST.

A snapshot of the formal requirements and stages involved in constituting a TBI is provided here for ready reference[i]:

Stage Detailed requirements
Stage I – Proposal Two hard copies + soft version in MS word document in prescribed format; necessary enclosures, and consent for Terms and Conditions; must be forwarded by the Head of HI (with necessary endorsements).

Necessary enclosures that must be included:

Registration Certificate of the HI; Memorandum of Association/Bye Laws of HI; Audited Statement of Accounts for the last three years; and, Annual Reports for the last three years.

Stage II – Evaluation by NEAC and in-principal approval Evaluation of proposal is done by National Expert Advisory Committee (NEAC) on the standards innovation, incubation, and technology entrepreneurship which meets at least twice in a year. Proposal must be submitted up to one month before the meeting of NEAC.

If TBI is not-for-profit entity then, after in-principle approval they are eligible to funding from Govt. subject to these conditions:

·  Registration of TBI as not for profit society/trust or a section 8 company

·  separate bank account in TBI’s name

·  minimum 1000 sq. ft. of furnished space for hosting the TBI

·  minimum lease for land must be 15 years provided by HI

Stage III – Post Approval Conditions After the approval the following conditions must be met by the TBIs:

·  The TBI must be administered by the apex body called Governing Body.

· The Governing Body needs to be chaired by the Head of the Host Institution.

· The Governing Body of the TBI should meet every six months to review progress of TBI and provide policy guidelines for the operations of TBI.

· Each TBI would have a dedicated CEO & a compact team who works full time for TBI.

· Host institution would constitute a selection committee with a DST nominee as a member for the selection of the CEO.

· A suitable incentive mechanism (share of surplus, earning of TBI, equity stake, etc) should be evolved by the host institution for the CEO and his team. HI is free to decide on the remuneration of CEO.

·  TBI should execute appropriate agreement with incubatees. The residency period and the exit policy may also be defined clearly in the agreement.

Stage IV – Monitoring The TBI is expected to attain self-sustenance within five years of its being. However, after the approval, the Department of Science and Technology may constitute teams to monitor the progress of TBIs.

CSR in non-TBI Incubators

As per the Companies (Corporate Social Responsibility) Amendment Rules, 2018 dated 19 September, 2018[ii], provisions of the CSR Rules have been amended to widen the definition of CSR. It clarifies that the CSR Policy of the Company must include activities that are related to the ‘area or subjects specified’ in Schedule VII of the Act. Earlier, the provision only mandated activities mentioned in the CSR Policy to be related to the specific activities listed under Schedule VII of the Act. Through this amendment, the MCA has provided more freedom to companies in choosing their preferred CSR engagements under the CSR Policy.

Pursuant to the amendment, funding of activities by incubators not being TBIs approved by Central Govt. is now possible. However, the same should be within the scope of the CSR Rules.

Other important considerations for CSR by foreign companies:

Compliance with Foreign Contribution Regulation Act, 2010 (FCRA):

Under the FCRA, approval and license from the Ministry of Home Affairs (MHA) is required for accepting and utilizing grants under CSR from foreign companies (which qualifies as foreign contribution) to non-profit entities. Thus, foreign companies undertaking CSR will have to ensure that any third-party entities that it seeks to engage for its CSR activities have an FCRA license (For our post explaining the issue, read here).

Earlier Indian companies with majority foreign stake holding were also considered as a ‘foreign source’. However, after amendments made by the Finance Act, 2016, contributions made by companies whose foreign shareholding are within the limits specified under the FDI regulations are not be considered as ‘foreign source’. Thus, Indian subsidiaries of foreign companies do not fall within the ambit of FCRA compliances for their CSR activities.

[i] Detailed procedure may be referred to, available at:   http://www.nstedb.com/institutional/Approved%20Revised_guidelines_of_TBI.pdf

[ii] Available at:

 http://www.mca.gov.in/Ministry/pdf/CompaniesCSRPolicyAmendRules2018_19092018.pdf

Author: Avaneesh Satyang

CARRYING OUT CSR ACTIVITIES THROUGH A THIRD PARTY

The Companies Act, 2013 makes it compulsory for a company with an annual income of INR 1000 crores, or a net worth of INR 500 crores, or net profit of INR 5 crores to spend at least 2% of the average net profits during the three immediately preceding financial years towards Corporate Social Responsibility. The Act was lauded for the flexibility it provided to the companies with respect to how they could carry out their CSR activities. More about CSR here https://novojuris.com/2014/03/26/a-note-on-csr-corporate-social-responsibility/

CSR image

CSR activities can be undertaken through a third party non profit organizations which may be a registered society or trust or a Section 8 company under the Companies Act (Section 25 company under the 1956 Act).The implication of this rule is that requirements for CSR have been liberalised so as to utilise the participation of a third party to undertake CSR activities on behalf of the Company. Also, such outsourcing is desirable as it allows for non profits organizations who are specialised in carrying out a particular kind of activity, to undertake it for other companies as well. Such an entity would have to follow the specifications and modalities regarding utilization of funds, monitoring and reporting requirements as provided by the spending company. The Annexure to the Rules on CSR notified by the MCA has a prescribed format for reporting on CSR Activities by the Board. It must be ensured that the third party entity is able to keep track of provide all details to be detailed in the report format.

Further, the rules mandate that the third party entity being utilized for such services must have an established track record of a minimum of 3 years in conducting similar programs or projects.

FCRA restrictions

However, the intent to provide flexibility is scuttled by the some of the archaic provisions of the Foreign Contribution Regulation Act (FCRA). Under the FCRA, non-profit organizations (“NPO”) can only accept contributions from a foreign source once they register with or obtain prior permission from the Central Government. Without FCRA approval, grantee organizations in India may not legally receive foreign contributions from any donor.  The FCRA deems an Indian subsidiary of a foreign company to be a foreign company, and consequently, a foreign source. Further, Indian companies with foreign ownership of more than 50% are also treated as foreign sources.

 Hence, in case of an Indian subsidiary of a foreign company, or an Indian company which have foreign ownership of more than 50% need to ensure that in case they utilise the services of a non-profit entity to carry out their CSR activities, such entity must have obtained prior permission from the Central Government. It is noteworthy that the process of obtaining prior permission of the Central Government under the FCRA is a long and difficult process, and available to only organizations which are at least 3 years old. The permission, when granted, would apply to only a specific project and specific amount, which means that the NPO cannot use contribution for a different project or for any additional funding for the same project.

 The new Companies Act is an extensive and ambitious legislation. However, for it to be able to achieve its ends, it is important other laws are aligned with the intent of the Companies Act, as well. The FCRA restrictions, which are no longer relevant in an environment with liberalised flow of FDI in the country, pose a significant issue in companies being able to outsource their CSR spends.

Image credit: IndiaCSR