The Companies (Amendment) Act, 2019, published in the Gazette on 31 July 2019, represents a significant milestone in India’s ongoing corporate law reforms. Building on earlier ordinances, this legislation incorporates prior amendments effective from 2 November 2018 while also introducing new measures aimed at simplifying compliance, enhancing corporate governance, and strengthening oversight.
One of the key highlights is the shift from registration to filing of prospectuses, streamlining a once cumbersome process. The Act also broadens the scope of dematerialised securities, empowering the government to mandate demat for classes of companies beyond public companies. The focus on transparency is evident in changes to the identification of Significant Beneficial Owners (SBO), placing responsibility on companies and prescribing heavy penalties for failure.
The Act also reinforces the National Financial Reporting Authority’s (NFRA) role, clarifies its powers to debar auditors, and establishes a division-based structure for efficiency. Amendments to Corporate Social Responsibility (CSR) provisions introduce strict timelines for unspent funds, penal consequences for non-compliance, and expanded obligations for newly incorporated companies. Further, the Serious Fraud Investigation Office (SFIO) gains sharper powers of arrest and disgorgement, while provisions on inquiry into director conduct, petitions for winding up, and Registrar’s authority are strengthened.
While these amendments reflect the government’s commitment to stronger governance and fraud prevention, they also increase compliance costs and demand constant adaptation from corporates and professionals alike. The Act strikes a balance between simplification and stricter accountability, marking another important step in India’s corporate law evolution.
Background
The Companies (Amendment) Act, 2019 was enacted by Parliament and published in the Gazette on 31 July 2019. Its objectives were twofold:
a) To incorporate amendments introduced earlier through the Companies (Amendment) Ordinance, 2018, which had been successively extended by the Companies (Amendment) Ordinance, 2019 and the Companies (Amendment) Second Ordinance, 2019. These provisions were deemed effective from 2 November 2018.
b) To introduce additional amendments focused on simplifying procedural aspects and strengthening corporate governance. These provisions were scheduled for notification at dates to be determined by the Central Government (CG), similar to the phased implementation model adopted in the Companies (Amendment) Act, 2017.
The earlier ordinance-driven amendments had already been summarised in M2K’s prior alerts, and an annexure to this note revisits those. This alert, however, centres on the new amendments not included in the Second Ordinance of 2019.
1. Prospectus to be filed with the Registrar (Section 26, 35, 398)
The Act removed the requirement for registration of prospectuses, substituting it with a simplified filing process with the Registrar. This change reduces procedural hurdles and aligns with the push for digital compliance.
Consequential amendments were made to Section 35 (civil liability for misstatements in prospectus) and Section 398 (electronic filing provisions), ensuring consistency across the Act.
2. Offer of securities in dematerialised form (Section 29)
The Act broadened the ambit of dematerialisation. The CG is now empowered to prescribe classes of companies, not restricted to public companies, that must issue securities exclusively in dematerialised form.
For unlisted companies falling into such prescribed categories, all issuance, holding, and transfer of securities must comply with the Depositories Act, 1996. This expansion underscores India’s intent to push digitisation and transparency in corporate ownership structures.
3. Identification of Significant Beneficial Owner (SBO) (Section 90)
Amendments to Section 90 heightened accountability by casting a direct responsibility on companies to identify individuals qualifying as SBOs.
- Failure to comply attracts a fine ranging from ₹10 lakhs to ₹50 lakhs.
- If the failure continues, an additional penalty of ₹1,000 per day may be levied.
The CG retained power to make rules under this section. Earlier, the Companies (Significant Beneficial Ownership) Rules, 2018—amended in February 2019—were already in effect.
Notably, the provision for imprisonment of individuals failing to declare SBO status, included in the Second Ordinance, was dropped in the final 2019 Act. This reflects a more balanced approach: penalising companies heavily but avoiding imprisonment for individuals.
4. Constitution of National Financial Reporting Authority (NFRA) (Section 132)
The NFRA provisions were restructured to improve efficiency and clarity:
- NFRA is now empowered to perform its functions through divisions, each led by the Chairperson or a full-time member authorised by them.
- Its executive body will comprise the Chairperson and full-time members, ensuring sharper oversight.
- NFRA’s power to debar members or firms from professional practice was narrowed. It can now specifically debar them from being appointed as auditors, internal auditors, or valuers under Section 247, while retaining the authority to impose monetary penalties.
These changes clarified NFRA’s jurisdiction and strengthened its functional framework without expanding its powers excessively.
5. Corporate Social Responsibility (CSR) (Section 135)
CSR provisions were overhauled to enforce stricter accountability:
- For ongoing projects, unspent CSR amounts must be transferred to a separate bank account and utilised within three years. Any balance after this period must be transferred to a Schedule VII fund (e.g., Prime Minister’s National Relief Fund, Swachh Bharat Kosh, Clean Ganga Fund).
- For other cases, unspent CSR funds must be transferred to a Schedule VII fund within six months of the financial year’s end.
- Newly incorporated companies meeting the CSR applicability threshold are now required to spend 2% of the average net profits of the years since incorporation, rather than waiting three years.
Non-compliance with CSR provisions now carries penal consequences:
- Companies: Fine between ₹50,000 and ₹25 lakhs.
- Defaulting officers: Imprisonment up to three years, or a fine between ₹50,000 and ₹5 lakhs, or both.
The CG is also empowered to issue directions to companies to ensure CSR compliance.
6. Investigation by Serious Fraud Investigation Office (SFIO) (Section 212)
The SFIO’s investigative powers were significantly bolstered:
- Any officer of SFIO, not below the rank of Assistant Director, may arrest a person if authorised.
- Arrested individuals must be produced before a Special Court or Magistrate within 24 hours.
- If an SFIO report concludes that fraud occurred and directors, Key Managerial Personnel (KMP), or officers benefitted, the CG may apply to the Tribunal for disgorgement. In such cases, the implicated individuals can be held personally liable without limitation.
This provision marks a firm stance against corporate fraud, making it riskier for management to engage in malpractices.
7. Application to Tribunal for inquiry on conduct (Sections 241, 242, 243)
New provisions empowered the CG to require that certain cases involving allegations of mismanagement or conduct prejudicial to public interest be filed only before the Principal Bench of the National Company Law Tribunal (NCLT).
The Tribunal, on reference from the CG, may:
- Inquire whether an individual is fit and proper to hold office as a director or in company management.
- Disqualify such a person from holding office for five years.
- Permit earlier reinstatement with leave of the Tribunal.
Importantly, individuals removed under these provisions are not entitled to compensation for termination.
8. Power of Registrar to present petition for winding up (Section 272)
The Registrar of Companies was explicitly empowered to present a petition to the Tribunal for winding up a company on the grounds that it is “just and equitable.”
This strengthens the Registrar’s authority to initiate winding-up proceedings where companies are found unfit to continue.
M2K Remarks
The steady stream of amendments to the Companies Act reflects the government’s commitment to keeping corporate law dynamic and responsive to changing circumstances. The refinement of CSR rules, five years after their original introduction in 2014, illustrates the intent to give businesses a settling-in period before tightening enforcement.
Strengthening investigative powers, particularly for SFIO, is a welcome step in the wake of rising corporate frauds, ensuring that offenders face real personal liability. On the other hand, frequent amendments inevitably raise compliance costs and place pressure on corporates and professionals to stay constantly updated.
Overall, the Companies (Amendment) Act, 2019 strikes a balance—simplifying certain procedures, enhancing accountability in others, and reinforcing corporate governance in India’s evolving business landscape.
