The government will now be able to remove and ban chief executive and directors of a company facing fraud from holding a key managerial position in any company for a period of five years.
The Union Cabinet on Wednesday cleared a proposal to amend the provisions of Companies Act, 2013, giving powers to the Ministry of Corporate Affairs (MCA) to act against them. The Cabinet also gave its nod to amend a Corporate Social Responsibility (CSR) provision, allowing the companies to spend CSR funds over a period of three years instead of one year at present.
The government will move close to 40 amendments as part of the Companies (Amendment) Bill to replace the ordinance in the current session of Parliament ending July 27. The proposed amendment in sections 241, 242 an 243 of the Act will allow the MCA to move the National Company Law Tribunal (NCLT) seeking to declare a director or a person holding any other office connected with the conduct and management of any company not fit and proper to hold the post, and debar for five years. If the tribunal finds a person not fit and proper, “such a person shall not hold the office of a director or any other key managerial post”, as per amendment of Section 243 of Companies Act. Such a person will “not be entitled to, or paid any compensation for the loss or termination of office”, as per the section. Currently, the law doesn’t stipulate fit and proper conditions for persons in the Board roles.
What the Bill proposes
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- MCA can move National Company Law Tribunal seeking to declare a director or connected with the conduct and management of any company not fit and proper to hold the post
- The government will be able to move against management persons on the grounds of not conducting and managing the business of a company with sound business principles
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The government may also permit such a person to hold the office before the expiry of five years with the consent of NCLT.
The government will be able to move against the director and other management persons on the grounds of not conducting and managing the business of a company with sound business principles or prudent commercial practices, causing serious damage to the interest of business or with an intent to defraud creditors.. for fraudulent purpose or in a manner prejudicial to public interest, as per the amendment to Section 241 of the Companies Act.
The trigger for bringing in this amendment is IL&FS case where the government moved NCLT to oust the Board, replacing it with its nominee directors. “We would have handled the situation in a better manner if we had these powers at that point of time,” said a senior ministry official, adding that the latest provision would, however, be used sparingly and in the cases where public interest has been compromised.
In a relief to the industry, the CSR provisions of Companies Act, 2013, are being amended to allow companies to spend CSR funds over a period of three years instead of the current year. The companies will have to transfer the unspent CSR funds to an escrow account at the end of the financial year. The firms which haven’t made any expenditure towards CSR in a given year will have to transfer the amount to the newly set up National CSR Fund. at the end of the year.
Others can transfer the remaining unspent money after three years.
After getting the Cabinet’s approval, the proposed amendments will be tabled in Parliament as part of the Companies (Amendment Bill) to replace the ordinance. The ordinance that amended around 30 sections of the Act was promulgated in November, and later re-promulgated as it could not be passed by Parliament in the NDA-1 term.
As many as 16 corporate offences under the Act have been decriminalised through the ordinance.
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