COVID19: MCA Announces Relief Package For Indian Companies
COVID-19 has brought India to a standstill, with the Government of India announcing a country wide lockdown vide Order dated March 24, 2020 for 21 days which is likely to continue for the foreseeable future.
COVID-19 and the national lockdown have made regulatory compliances difficult for companies, more so since the end of the financial year marks the deadline for multiple filings and data reporting under Indian laws. In order to ease this burden on companies and limited liability partnerships (“LLPs”), the Ministry of Corporate Affairs (“MCA”) has announced measures for relaxing the compliances to be made by Indian companies.
1. Exemptions: MCA has issued Circular No. 11/2020 dated March 24, 2020 (“Exemption Circular”) providing the following relaxations:
- Board Meetings: Companies are required to hold at least four meetings of its board of directors (“Board”) annually with not a gap of not more than 120 days between two consecutive meetings. Under the Exemption Circular, this requirement has been extended by 60 days and the permitted interval between two meetings now stands at 180 days. This relaxation is available for the next two quarters ending September 30, 2020.
- Video-Conferencing: Companies can hold Board meetings through video conferencing or other audio visual means until June 30, 2020 for: (i) approval of annual returns and financial statements; (ii) approval of the Board’s report; (iii) approval of a prospectus; (iv) audit committee meetings for consideration of financial statements to be approved by the Board; and (v) the approval of amalgamation, merger, demerger, acquisition and takeover. These were earlier not permitted to be held through video conferencing or other audio visual means.
- New Statutory Audit Form: The updated format for statutory audits of companies was to be effected from financial year 2019-20 under which all companies (except one person company, banking and insurance companies, small companies, non-profit companies) are now mandatorily required to disclose all whistleblower complaints to their auditors. To ease the burden on companies this will now be applicable from the financial year 2020-2021.
- Independent Director Meetings: Independent directors are required to hold at least one meeting without the attendance of non-independent directors and management team. For the year 2019-2020, if independent directors have not been able to hold a meeting, the same will not be treated as a violation of the Companies Act, 2013 (“Act”). The independent directors can share views between themselves by telephone, email or any other mode of communication, as they may deem fit.
- Delayed Filings: The MCA has prescribed that no additional fees shall be levied in case of delay in filing forms, statements, etc in MCA-21 till September 30, 2020. This applies to filings required under Section 124 and 125 of the Act read with rules, as also other forms such as IEPF 1, IEPF-1A, IEPF-2, IEPF-3, IEPF-4, IEPF-7 and e-verification form IEPF-5.
- Reserve Requirements: A company can accept deposits from its members, subject to meeting certain conditions, including depositing 20% of its deposits amount maturing during the following financial year in the deposit repayment reserve account, on or before the April 30 each year. In respect of bonds or non-convertible debentures, companies must deposit 15% of the debenture amount maturing during the year ending on March 31, 2021 in specified methods of investments or deposits by March 31, 2020. Such investments or deposits are required to be made on or before the April 30 in each year. Both deadlines for deposits and debentures have been extended from April 30, 2020 until June 30, 2020.
- Other Miscellaneous Changes: Under the Act, a newly incorporated company is required to file a declaration of commencement of business within 6 months of its incorporation. The Exemption Circular now provides an additional 6 months for this purpose. Further, non-compliance with the requirement of at least one director of an Indian company staying in India for at least 182 days in a financial year, will no longer be a violation of the Act.
Also, Companies Fresh Start Scheme, 2020 has been introduced by the MCA vide Circular No. 12/2020 dated March 30, 2020 and some modifications have been made in the LLP Settlement Scheme, 2020 vide Circular No. 13/2020 dated March 30, 2020, which will not only reduce the compliance burden but also enable longstanding non-compliant Companies/LLPs to make a fresh Start.
2. Clarification on passing General and Special Resolutions by Companies: Looking into the pandemic situation and circumstances, companies have been requested to take all urgent decisions requiring approval of members, other than items of extraordinary business or business where any person has a right to be heard, through postal ballot/e-voting mechanism, in accordance with the provisions of the Act and rules framed thereunder (without holding general meeting which requires physical presence of members at a common venue). The procedure for conducting such meetings is laid down in Circular No. 14/2020 dated April 8, 2020.
Further to resolve certain issues faced by the stakeholders in receiving and serving notices/responses by post in the current circumstances, the Government has announced measures such as use of electronic means (emails, video conferencing or other Audio Visual methods) for serving/receiving notices/responses for EGMs the procedure for which is prescribed in Circular No. 17/2020 dated April 13, 2020.
3. Corporate Social Responsibility (“CSR”) activities: The Act makes it mandatory for companies having: (i) net worth of INR 500 crore or more; (ii) turnover of INR 1000 crore or more; or (iii) net profit of INR 5 crore or more during any financial year, to constitute a CSR committee and formulate a CSR policy indicating CSR activities to be undertaken. It is mandatory that a company spends at least 2% of average net profit for the immediately preceding three financial years in every financial year in accordance with the CSR policy.
The Ministry of Corporate Affairs via General Circular No. 10/2020 dated March 23, 2020, has clarified that the amount spent on account of CSR funds for COVID-19 is eligible CSR activity. This includes any contribution made to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund set up to provide relief to those affected by any kind of emergency or distress situation by the Government of India. The funds may be spent for various activities which are mentioned under item number (i) which includes activities relating to and eradicating hunger, poverty, malnutrition, promoting healthcare including preventive healthcare, sanitation, making available safe drinking water and (xii) which relates to disaster management including relief, rehabilitation & reconstruction activities of Schedule VII of the Act.
4. Companies Affirmation of Readiness towards COVID-19 (“CAR”): On March 23, 2020 MCA introduced an online form “Form CAR” where companies and LLPs have to confirm compliance with CoVID 19 guidelines issued by public health authorities, including implementation of work from home policy. For ease of filing, no payment is required to file the form and there is no penalty for failure to file.
The MCA response to COVID-19 has been prompt and largely adequate. The objective of these measures is to ensure ease of regulatory compliances for corporates and social distancing by permitting holding of meetings, etc. through online modes.
There is still a long way to go, however. For instance, representations have been made by various sections of the Indian corporate sector requesting MCA for additional changes such as: (i) dispensing with the requirement of holding AGM physically for all companies till September 30, 2020 and permitting transacting ordinary items of business solely through e-voting facility; (ii) permitting payment of dividend to shareholders only through online payment facilities to the registered bank account or other permitted modes (like ECS credit); (iii) permitting dispatch of annual report and notice of AGM through e-mail without requiring companies to print and post such documents, and (iv) extension in registration of independent directors for database and for appearing for exams.
It remains to be seen how the COVID-19 situation unfolds in the country and what additional steps the Government has in store should the situation worsen.