Updated: Aug 2, 2020
This article has been authored by Devanshu Anada, a current third year student at Gujarat National Law University, Gandhinagar.
The coronavirus pandemic has adversely affected the manufacturing and corporate sector of various countries across the world because of the unforeseen restrictions. The corona virus pandemic started spreading in India in around the mid of March, 2020 in India. After that various travel restrictions ensued which affected the travel of professionals involved in the top-level management of several companies. In order to control the spread of the air-borne virus, the Government of India (‘GoI’) ordered a nationwide lockdown which was extended till May 31, 2020 and led to the closure of all non-essential businesses, offices, workplaces including all their physical establishments.
To ease the difficulties in complying with the provisions of Companies Act, 2013 (‘the Act’) and various rules framed thereunder, the Ministry of Corporate Affairs (‘MCA’) has granted several relaxations from time to time in compliance of provisions that have become impracticable to be complied with, given the current situation. The relaxations are provided by the way of an amendment in rules and also through circulars and/or notification under the concerned legislation which are framed after considering the clarifications and suggestions taken from the relevant stakeholders. The relaxations provided inter alia relate to conduct of meetings, manner of passing of resolutions, extension in dates for certain filings, etc. which is the subject matter of this article. Similarly, for listed companies, relaxations are provided by the government under SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations, 2015, however, this article will restrict itself to analyse the relaxations provided under the Companies Act, 2013.
Analysis of relaxations provided under Companies Act, 2013
The major relaxations provided by MCA till date can be classified into following broad heads:
1. Relaxations with respect to conduct of Board Meetings
By virtue of the circular issued by MCA in March, with respect to Board Meetings, the requirement of holding meetings within a period of 120 days from the last meeting under Section 173 of the Act, was extended by 60 days till 30th September, 2020. Section 173(2) of the Act provides that the board meeting maybe conducted through Video Conferencing (‘VC’) or other audio-visual means (‘OAVM’) which are capable of being recorded and recognized the participation of directors. The conduct of meetings through VC or OAVM is permitted only when the procedure mentioned in Rule 3 of the Companies (Meetings of Board and its powers) Rules, 2014 (‘MBP Rules’) is complied with during the conduct of the meeting.
However, Rule 4 of MBP Rules places a restriction on dealing of certain matters in a virtual meeting such as approval of financial statements, board reports, prospectus or approval of amalgamation, merger, et. al. This restriction was temporarily lifted till 6th June, 2020 by virtue of a notification by MCA which amended the MBP rules by Companies (MBP) Amendment Rules, 2020 transact any matter of the company as if they did in a physical meeting. This relaxation will go a long way in making the management of the company possible and accessible, given the current travel restrictions.
Moreover, the requirement of conduct of a meeting by only independent directors without the attendance of non-independent directors is waived off for the FY 2019-20. This step was taken taking into account that the independent directors are generally working as directors of multiple companies and it might become difficult for them to hold a meeting due to the lockdown orders by the government. Also, due to the international travel restrictions the minimum criteria of stay in India for 182 days to be a residential director is being waived off for FY 2019-20.
2. Flexibility in conducting General Meetings (AGM & EGM) and in mode of passing of Ordinary and Special Resolutions
Section 108 of the Act provides for the facility of voting through electronic means where the members who are not able to physically attend the meeting can exercise their right to vote by taking part in a virtual meeting. However, unlike board meetings, the Act does not provide for allowing to conduct an AGM wholly through a VC or OAVM, as only hybrid meetings (which is a combination of online participation as well as option of attending the meeting in person) are allowed for AGM. To overcome this hurdle, initially MCA through a circular allowed the use of postal ballot as well as electronic means to transact any business which is not ordinary business or any business where any person has right to be heard under Section 110 and 108 of the Act without holding a general meeting. The business that can be transacted and the procedure to be followed for transacting the same through postal ballot or electronic means are provided for in Rule 22 of Companies (Management and Administration) Rules, 2014.
Thus, holding of an AGM virtually was not allowed then by the MCA but later through another circular dated 05-05-2020, considering the continuing travel restrictions, holding of AGM entirely through electronic means was allowed provided that only special business other than ordinary one which is considered to be unavoidable by Board can be transacted. The notice of the meeting clearly mentioning the mode of the conduct of meeting, the method to join the meeting along with copies of financial statement, auditor’s report and all other documents that are required to be attached should be attached with the mail sent to the members. Moreover, the time limit of conducting an AGM within 6 month from the end of FY as stipulated under Section 96 of the Act has been extended to 9 months for the companies whose FY ends on December, 2019.
With respect to holding of an EGM, if considered unavoidable by the management, the MCA has made an exception and allowed for conducting such EGM wholly through VC and OAVM means and has prescribed the procedure to be followed for the same through a circular. The circular inter alia requires that two-way tele-conferencing is made possible, facility of e-voting is provided during the time of the meeting, capacity of hosting at least 1000 members, notice of the meeting to be sent to registered e-mail id, etc. Therefore, as of now, ordinary resolutions and special resolutions are allowed to be passed in an AGM as well as EGM through electronic means by e-voting and the copy of such resolution passed shall be filed with registrar of companies within a period of 60 days as per the MCA guidelines.
3. Expanding the scope of contributions made to comply with Corporate Service Responsibility (‘CSR’) requirements
The companies that are mandated to undertake CSR activities under Section 135 of the Act have to ensure that the company spends in every FY at least 2% of the average net profits of company during 3 preceding FYs. The list of activities eligible to be termed as CSR expenditures are listed in Schedule VII of the Act. To divert these funds towards the problem at hand i.e. the pandemic which poses a threat to the Indian economy, MCA has issued an clarification and interpreted the Schedule VII liberally to include spending towards Covid-19 to be a valid CSR activity. Later, MCA through the general circular dated 10-04-2020 provided an exhaustive list of FAQs concerning spending of CSR funds towards Covid-19 relief so as to bring more clarity on what constitutes to be an expenditure towards Covid-19 relief. Contribution to PM CARES Fund, Chief Minister’s Relief Fund, State Disaster Management Authority, etc. have been qualified as CSR expenditures.
However, payment of salary/wages to employees and workers even during the lockdown period cannot be called as CSR expenditure of the companies as it is the moral obligation of employers to provide for workers who have no alternative means to earn livelihood. But it is pertinent to note that if any ex-gratia payment is made to casual or daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19, the same shall be admissible towards CSR expenditure as a onetime exception provided a declaration from the Board of Directors is obtained and certified by the statutory auditor.
4. Company Fresh Start Scheme (‘CFSS’), 2020 and other Miscellaneous Relaxations
Filing of annual returns and financial statements as well as other returns on MCA-21 electronic registry within prescribed time limit is mandatory under Section 403 of the Act r/w Companies (Registration Offices and Fees) Rules, 2014 failing which penalties can be imposed under the provisions of the Act. For giving an opportunity to the defaulting companies as well as to the companies which are unable to fulfil the compliance in wake of Covid-19 situation, MCA has by Circular no. 12/2020 introduced the CFSS, 2020 which provides a window from 01-04-2020 to 30-09-2020 during which belated filing of documents is permitted and an immunity from any consequential proceedings is provided. The application for seeking immunity in respect of belated documents can be made electronically after which the concerned authority shall withdraw any prosecutions pending against the company for penalty in respect of late filing of documents.
It is to be noted that the immunity envisaged in the scheme is only against delayed filing and not for other substantive violation of law by a company. In addition to this, the government has also waived fees charged for late filing of any document, return or statement from 01-04-2020 to 30-09-2020. Also, in view of the difficulties faced by the companies in sending notices through postal or courier services on account of threat posed by Covid- 19, the MCA has vide Circular no. 21/2020 provided that failure or inability to dispatch notice to shareholders for rights issue opening up to 31st July, 2020 shall not be viewed as a violation of Section 62(2) of the Act.
Thus, it can be seen that proactive steps have been taken by MCA to ensure that the corporate governance can be carried out in a smooth and flexible manner keeping in mind the existing Covid-19 situation. At the same time, it is also to be ensured that the interest of the stakeholders of the company are protected by forming an inclusive environment and the existing state of affairs do not lead to any prejudice to their rights as shareholders of the company. Many more relaxations are expected to follow in the future as well and e-governance of the company will continue to be encouraged by the MCA.