Regulatory Update: India's Companies Amendment Rules, 2020

Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020

On 3 February 2020, the Central Government notified the provisions of Section 230(11) and (12) of the Companies Act, 2013 which has come into force from 3 February 2020. The provisions enable takeover of a company by way of a scheme of arrangement or raise grievances in this relation, pursuant to an application being made to the National Company Law Tribunal (NCLT). In relation to this, the following notifications have also been issued, with respect to the procedural aspects for making the application(s) under Section 230(11) and (12):

• The MCA has notified the Companies (Compromise, Arrangements and Amalgamations) Amendment Rules, 2020 (“CAA Amendment Rules”), which amends the Companies (Compromise, Arrangements and Amalgamations) Rules, 2016 (“CAA Rules”). The CAA Amendment Rules inter alia stipulate that an application for arrangement (i.e. for making takeover offers for companies) can be made under Section 230(11) of the Companies Act by any member (along with other member(s)) holding not less than 3/4th of the ‘shares’ in the concerned company, and where such application has been filed for acquiring all or any part of the remaining ‘shares’ of such company. For this purpose, the term ‘shares’ shall mean “equity shares of the company carrying voting rights, and includes any securities, such as depository receipts, which entitles the holder thereof to exercise voting rights.” Further, it is also clarified that the aforesaid sub-rule will not be applicable in case of any transfer or transmission of shares through a contract, arrangement or succession, as applicable, or any transfer made in pursuance of any statutory or regulatory requirement; and
• The MCA has also notified the National Company Law Tribunal (Amendment) Rules, 2020 which inter alia provides that an application can be made (in Form NCLT-1) under Section 230(12) (i.e. by an aggrieved party in cases of grievances with respect to a takeover offer of unlisted companies).

Further, in terms of sections 230(11) and 230(12) of the Companies Act, 2013 (now notified), the majority shareholders of a company have another option in addition to options already available (such as reduction of share capital under Section 66 of the Companies Act and purchase of minority shareholding under Section 236 of the Companies Act) to achieve the exit of minority shareholders.

Common Application Form (CAF) for Foreign Portfolio Investors

On 4 February 2020, the Securities and Exchange Board of India (“SEBI”) issued a notification that the applicants seeking Foreign Portfolio Investors (FPIs) registration shall be required to duly fill CAF and ‘Annexure to CAF’ and provide supporting documents with the applicable fees for SEBI registration and issuance of Permanent Account Number (PAN). Further, designated depository participants (DDP) may accept in-transit FPI registration applications, for a period of 60 days from 4 February 2020 as per the form as prescribed in operational guidelines issued on 5 November 2019. This notification was issued in furtherance of the Government of India’s (GoI) earlier notification dated 27 January 2020 notifying the Common Application Form (CAF) for the purpose of:

• The registration of Foreign Portfolio Investors (FPIs) with SEBI;
• The allotment of Permanent Account Number (PAN); and
• Carrying out of Know Your Customer (KYC) for the opening of bank and Demat accounts.

Micro, Small and Medium Enterprises (MSME) Sector – Restructuring of Advances

On 11 February 2020, the Reserve Bank of India (“RBI”) extended the timeline for a one-time restructuring of existing loans granted to MSMEs classified as ‘standard’, without a downgrade in the asset classification, subject to the following certain conditions:

• Aggregate exposure of banks and Non-Banking Financial Companies (NBFCs) to such borrowers not exceeding INR 25 crore as on 1 January 2020;
• Restructuring of the borrower account being implemented on or before 31 December 2020;
• Borrowing entity being Goods and Services Tax (GST) registered (if applicable) on the date of implementation of the restructuring; and
• The relevant borrower’s account not already being restructured in terms of the circular issued on 1 January 2019.

Companies (Registration Offices and Fees) Amendment Rules, 2020

On 18 February 2020, the MCA, notified the Companies (Registration Offices and Fees) Amendment Rules, 2020 which amends the Companies (Registration Offices and Fees) Rules, 2014, pursuant to which the existing Form GNL-2 (i.e. the form to be filed for submission of documents with the Registrar of Companies, for which no e-form is prescribed under the various rules under the Companies Act, 2013) has been substituted with a revised Form GNL-2.

Companies (Incorporation) Amendment Rules, 2020

The MCA, on 18 February  2020, notified the Companies (Incorporation) Amendment Rules, 2020 (“Incorporation Amendment Rules”) to amend the Companies (Incorporation) Rules, 2020. With effect from 23 February 2020, the Incorporation Amendment Rules has inter alia introduced the following amendments:

• The form RUN (Reserve Unique Name), which was earlier used for reservation of names for companies (i.e. existing companies or companies yet to be incorporated), has now been amended to be applicable only for requesting a change of name of existing companies;
• The erstwhile e-form INC-32 (SPICe) has been substituted with the revised form INC-32 (SPICe+), which is an integrated web form which offers multiple services from three different ministries (i.e. Ministry of Corporate Affairs, Ministry of Labour & Department of Revenue in the Ministry of Finance);
• The e-form INC-35 (AGILE) has been substituted with Form INC-35 (AGILEPRO), which also enables professional tax registration and opening of bank account, in addition to the earlier registration facilities; and
• The erstwhile Form INC-9 (which was an offline form to be manually executed by the concerned director, and thereafter filed along with the SPICe form) has been substituted with the e-form INC-9, which is required to be verified by the concerned director by affixing his/her digital signature certificate (DSC).

Companies (Auditor's Report) Order, 2020

On 25 February 2020, the MCA notified the Companies (Auditor's Report) Order, 2020 (“Order”) in supersession of the Companies (Auditor's Report) Order, 2016. The Order provides that every report made by the auditor under section 143 of the Companies Act, 2013 on the accounts of every company audited by him, for the financial years commencing on or after 1 April 2019, shall additionally contain the matters specified under this Order. The key matters to be included in the auditors’ report are mentioned below:

• Details regarding the plant, property and equipment including quantitative details, revaluation, maintaining proper records etc.
• Details regarding proceedings against a company under Benami Transactions (Prohibition) Act, 1988.
• Details about inventory, proper verification of records, proper returns filed or not etc.
• Details regarding loans and advances given by the company, outstanding loans, renewal of loans and loans given without specifying terms of repayment.
• Details of loan taken by the company and whether loans were used for the purpose for which it was taken, loans taken to meet the obligation of subsidiaries, joint ventures (JV) or associates and whether such loans are taken by pledging shares of subsidiaries, JV and associates.
• Details on the treatment of undisclosed income disclosed in a current year during tax assessments.
• Details on the internal audit system, if applicable.
• Details on cash loss in the previous year or immediate preceding year.
• Compliance of corporate social responsibility under section 135 of the Companies Act, 2013, if applicable.
• Details on the material uncertainty of a company to meet its short term financial liabilities- the same needs to be ascertained using ratios, ageing analysis and expected dates of realisation of financial assets.

Companies (Appointment and Qualification of Directors) Amendment Rules, 2020

On 28 February  2020, the MCA notified the Companies (Appointment and Qualification of Directors) Amendment Rules, 2020 (“Appointment Amendment Rules”) which amends the Companies (Appointment and Qualification of Directors) Rules, 2014 (“Appointment Rules”). The Appointment

Amendment Rules have introduced the following key amendments:

• The time provided to an individual appointed as an independent director to apply online for the inclusion of his/her name in the databank of the list of independent directors maintained as per the Appointment Rules (“Databank”), has been extended from three months (i.e. by 1 March 2020) to five months (i.e. by 1 May 2020) from the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019; and
• The Appointment Rules stipulated that every individual whose name is included in the Databank is required to pass a proficiency test within one year of such inclusion.

However, the Appointment Amendment Rules have introduced an additional exception for individuals who have served as directors or key managerial personnel for a minimum period 10 years, as on the date of inclusion of their names in the Databank, in body corporates listed on a recognized stock exchange. Further, it has been clarified that individuals acting as directors or key managerial personnel in two or more companies or bodies corporate (as opposed to only companies, as provided earlier) at the same time will be counted only once for the purpose of determination of the aforesaid 10 year period.

Clarification on prosecutions filed or internal adjudication proceedings initiated against independent directors, non-promoters and non-KMP/ non-executive directors

On 2 March 2020, the MCA issued a circular clarifying the aspects with respect to the initiation of prosecution against directors of Indian companies, which inter alia provides for the following:

(a)        Whole-time director (WTD) and key managerial personnel (KMP) associated with the day to day functioning of the company shall ordinarily be liable for the defaults of the company. In absence of WTD/ KMP, such director or directors who have expressly given their consent for incurring liability (by filing intimation in e-form GNL-3 with the MCA) would be liable for defaults of the company. However, in a case wherein the penal provisions under the Companies Act, 2013 (Act) provides that a specific director, or officer, or any other person would be accountable for the default, in such case prosecution would be initiated by the Registrar of Companies (“ROC”) only against the concerned director, or officer, or any other person accountable for the default and not against the other directors/ officers.

(b)        Independent directors or non-executive directors shall not be arrayed in any civil or criminal proceedings under the Act, unless the default has occurred with their knowledge, attributable through board process, and with their consent or connivance or where they had not acted diligently as per the provisions of the Act.

(c)        All the instances of filing of information/records with the registry, maintenance of statutory registers or minutes of the meetings, or compliance with the orders issued by the statutory authorities (including NCLT), are not the responsibility of independent directors or non-executive directors. Accordingly, independent directors and non-executive directors would not be ordinarily liable for the default of the company, unless any specific requirement is provided in the Act or in the orders of any statutory authority. However, where there are no WTDs and KMPs in the company, non-executive directors may be liable for the defaults of the company.

At the time of serving notices to the company during an investigation, inquiry, or an adjudication proceeding, necessary documents may be sought by the ROC so as to ascertain the involvement of the concerned officers of the company. In case the lapses are attributable to decisions taken by the board or its committees, all care would need to be taken by the ROC so as to ensure that any proceedings are not unnecessarily initiated against the independent directors or non-executive directors, except in cases where sufficient evidence exists to the contrary.

Cabinet approves the Foreign Direct Investment policy on Civil Aviation

On 2 March 2020, the Union Cabinet approved to amend the extant Foreign Direct Investment (FDI) Policy to permit foreign investment(s) in M/s Air India Ltd by non-resident Indians (NRIs), who are Indian Nationals, up to 100% under the automatic route. As per the present FDI Policy, 100% FDI is permitted in scheduled Air Transport Service/Domestic Scheduled Passenger Airline (up to 49% under automatic route and Government route beyond 49%).  However, for NRIs, 100% FDI is permitted under automatic route in Scheduled Air Transport Service/Domestic Scheduled Passenger Airline.

The amendment in FDI policy will permit foreign investment in M/s Air India Ltd at par with other Scheduled Airline Operators i.e. up to 100% in M/s Air India Ltd by those NRIs, who are Indian Nationals. Further, this amendment to the FDI Policy is meant to liberalize and simplify the FDI policy to provide ease of doing business in the country leading to largest FDI inflows and thereby contributing to the growth of investment, income and employment.