Revised MSME Definition: Impact Analysis

  • 14 June, 2020
  • T. Sathya Prasad

On 12th May 2020, the Prime Minister of India announced an economic package worth Twenty Lakh Crores for various sectors and segments to achieve the goal of self-reliant India. This economic stimulant package was intended to uplift the fallen economy due to COVID 19 outbreak and combat the adverse impact of lockdown.

The proposed economic stimulus package included significant measures for facilitating the promotion, development and enhancement of the competitiveness of Micro, Small and Medium Enterprises (MSME). The Ministry further noticed that the low threshold in MSME definition had created fear among MSMEs of graduating out of the benefits and hence killed the urge to grow. The Finance Minister, therefore, announced the following amendments to the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). The changes were approved by the Cabinet and the amendment was notified in the official Gazette on 01 June 2020. The amended classification of MSME shall come into effect from 01st July 2020. Here is a limited impact analysis of the above-mentioned amendment for your easy reference:

Key Changes

  1. Investment threshold criteria have been revised upwards.
  2. Additional criteria for turnover have been introduced.
  3. The distinction between the manufacturing and service sector has been eliminated

 

  1. Investment based threshold criteria

As per the MSMED Act, the following eligibility norms are based on investment by an enterprise[i] in a plant, machinery, or equipment only:

 

Classification

Micro

Small

Medium

Existing

Revised

Existing

 Revised

Existing

Revised

Manufacturing Enterprises

Investment < INR 25 lakhs

Investment < INR 1 Crore

Investment < INR 5 Crore

Investment <  INR 10 Crore

Investment < INR 10 Crore

Investment < INR 20 Crore

Service Enterprises

Investment < INR 10 lakhs

Investment < INR 2 Crore

Investment < INR 5 Crore
               

 

 

  1. Turnover based threshold criteria added to Investment norms:

 

The amendment has added the following turnover based criteria to above mentioned upward revised Investment norms:

 

Classification

Micro

Small

Medium 

Manufacturing and Services

Investment does not exceed INR 1 Crore

&

Turnover INR does not exceed 5 Crore

Investment does not exceed INR 10 Crore

&

Turnover INR does not exceed 50 Crore

Investment does not exceed INR 50 Crore

&

Turnover INR does not exceed 250 Crore

 

*The Turnover of Enterprise shall be determined by data provided/declared in Goods and Service Tax (GST) returns.

 

  1. Distinction between manufacturing and service sector eliminated:

 

The MSMED Act, 2006, provided for a separate threshold limit for the manufacturing and service Sector. As per the amended provisions, the difference between service and manufacturing sector has been removed.

 

Major Impact of The Amendment:

 

  1. Due to the revision of the threshold limit, many Enterprises will be registered under MSMED Act, 2006 to avail various incentives declared by the Government of India.
  2. With the amended definition, MSMEs will be able to access many industries such as electronics, apparel, chemical and pharmaceuticals, etc.
  3. The move is likely to improve the quality of product and export share of the country.
  4. Consequent to this amendment, many industries would now fall in the ambit of the MSME segment and settlement of invoices within 45 days may create a financial burden for non-MSME entities.
  5. Special economic packages/incentives to MSME entities may create employment opportunities and improve the productivity of indigenous manufacturing units.
  6. The removal of a separate threshold of investment and turnover criteria is expected to provide more encouragement to the service sector enterprises.
  7. The shift will facilitate the competitiveness of indigenous Enterprises against unhealthy competitions created by Foreign entities/investors.
  8. Redefine payment cycle by restricting delayed settlement to Micro and Small Enterprises by big Enterprises.
  9. Facilitate the intrinsic growth of manufacturing and export-oriented Enterprises.
  10. Due to the revision of the threshold limit under the MSMED Act, 2006, Companies will have to seek details of MSME registrations from vendors and suppliers of goods or services. The outstanding amount of more than 45 days as per provisions of Section 15 of MSMED Act, 2006 shall be reported by Companies in Form MSME-1 with the Ministry of Corporate Affairs.

 

Other Registration Requirements:

 

There is no separate MSME registration required for each branch/manufacturing unit of an enterprise. Enterprises are required to provide addresses and details of branches and manufacturing units at the time of registration and the same would be displayed in the Certificate issued under MSMED Act, 2006. Further, enterprises engaged in wholesale trading activities are not eligible to register as MSME Enterprises. MSME is to support start-ups with subsidies and benefits, whereas trading companies are just like middlemen, a link between manufacturer and customer.

 

Moreover, enterprises are required to fulfil only investment and turnover criteria to register under the MSMED Act, 2006. Hence, a subsidiary of another Indian Company or Subsidiary of Foreign Body Corporate can be registered as MSME Enterprise under MSMED Act, 2006. The Government would most likely notify more restrictions on applicability criteria for registration under the MSMED Act, 2006. The Statutory time limit for the realisation of Export payments is provided under the Foreign Exchange Management Act, 1999. Further, the liability to make payment to Micro and Small Enterprises under the provisions of Section 15 of the MSMED Act, 2006, is applicable only for outstanding payments against the domestic supply of goods or services.   

 

Conclusion:

 

The objective of the amendment is mentioned in the Statement of Objects and Reasons of the MSME (Amendment) Bill as “over a period of time, it has been felt necessary to change the criteria for the classification in order to align it with the need of current times and changing business ecosystem.”

 

Therefore, the amendment had been brought in with the belief that the criterion of investment in plant and machinery or equipment often incentivises the tendency in the promoters to keep the investment size small in order to retain the benefits associated with micro or small enterprises category. Further, the physical verification of the value of assets had been a difficult task. On the contrary, if the annual turnover is taken as a criterion for classification, the information available with goods and services tax networks and other sources can be used for the determination of the category of the enterprises.

 

Thus, to conclude the annual turnover based classification

  • will bring in a transparent and objective classification system 
  • will enable industrial growth and increased employment in the country and
  • will promote the ease of doing business 

 

References

[i] Meaning and Definitions:

 

Enterprise: As per the provisions of Section 2(e) of MSMED Act, 2006, “enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;

 

  1. Calculation of Investment of Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

Micro

Small

Medium 

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)       the cost of pollution control,

ii)     research and development,

iii)    industrial safety devices

iv)    such other items as may be specified, by notification, shall be excluded

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)         the cost of pollution control,

ii)       research and development,

iii)      industrial safety devices

iv)      and such other items as may be specified by notification shall be excluded

 

As per explanation to Section 7 (1) of MSME Act, 2006, investment in plant and machinery excludes-

i)         the cost of pollution control,

ii)       research and development,

iii)      industrial safety devices

iv)      land and building

and such other items as may be specified in vide notification No.S.O.1722(E) dated October 5, 2006 issued by Ministry of Small-scale Industries

 

 

Investment by Enterprises engaged in providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006

 

 

Image Credits: Photo by Bill Oxford on Unsplash

while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

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A legal Analysis of the Companies Fresh Start Scheme-2020

  • 7 May, 2020
  • Anjali Haridas
  • Richa Mishra

To mitigate the economic hardship caused due to COVID-19 pandemic and to facilitate ease of doing business, various efforts are being made by the Government of India. In furtherance of these initiatives, the Ministry of Corporate Affairs (“MCA”) has brought about certain relaxations for companies vide its general circular no. 13/2020 dated 30th March 2020 (“Circular”). The relaxation enables companies to regularize compliance-related filing with the Registrar of Companies ( “Registrar”).

The Companies Act, 2013 (and erstwhile 1956 Act) (‘hereafter the ‘Act’) stipulates various mandatory filings for companies, and in case of failure in adherence, penal provisions are attracted in most instances.  It is observed from the list of ‘defaulter companies’ provided under the official website of the MCA that there is a substantial increase in the number of non-compliances by companies. The defaults are mostly caused due to difficulties in understanding the applicability of a provision or due to paucity of time. This leads to a large number of companies being unable to file the required forms and returns with the Registrar within the stipulated time and thereby resulting in being in default under the Act.

In order to lighten the burden of the defaulting companies[1], the MCA has brought out the Companies Fresh Start Scheme, 2020 (hereafter referred to as the “Scheme”), whereby companies have been provided with the flexibility to fulfill pending filing compliances. The Scheme thereby condones the delay in filing the documents, forms, and returns with the Registrar without payment of any additional fees.

 

Applicability of the Scheme:

The Scheme has been promulgated by the MCA under Section 460 read with Section 403 of the Act, which empowers the Central Government to expressly condone the delay in filings with the Registrar.

The Scheme is applicable to all defaulting companies whose documents, returns, or forms are pending for filing as of the date of the notification of the Scheme. The benefits under the Scheme are available to both domestic companies registered under the Act as well as foreign companies. The Scheme also gives an opportunity to Inactive Companies[2] to get their companies declared as a ‘dormant company’ under Section 455 of the Act by filing a simple application on payment of the normal fee. The said Scheme is effective from 01st April, 2020 and is valid till 30th September, 2020.

However, it may be noted that the Scheme is not applicable in the following cases:

  1. Where a final notice for striking off the name of the company under Section 248 of the Act has already been issued by the designated authority.
  2. Where a company has Suo-moto applied for striking off the name of the company from the register of companies.
  3. Where a company is amalgamated under the scheme of compromise and arrangement under the provisions of the Act.
  4. Where the company had applied for dormant status under Section 455 of the Act before the introduction of the Scheme.
  5. For Vanishing Companies[3].
  6. For documents related to increasing in Authorized Share Capital (Form SH-7).
  7. For charge-related documents i.e. Form CHG-1, CHG-4, CHG-8, and CHG-9.
 
 

The Process under the Scheme:

The Scheme stipulates that every defaulting company will be entitled to make the belated filing by paying only the normal fees as prescribed under Companies (Registration office and Fees) Rules, 2014 for filing of all such belated forms, returns, and documents, and no additional fees is required to be paid. After filing the pending document under the Scheme, the defaulting company is required to file e-form CFSS-2020 on the MCA website, without paying any fees thereon, giving brief details of the belated forms which have been filed by it. It is pertinent to note that the defaulting company is required to file the e-form CFSS-2020 within 6 months from the closure of the Scheme i.e. it has to be filed between 01st October 2020 and latest by 31st March 2021 in order to claim immunity under the Scheme.

If a defaulting company has filed an appeal against any notice, complaint, the order passed by the court or by an adjudicating authority, it can file an application under this Scheme for immunity certificate only after withdrawing such appeal and furnishing proof of such withdrawal with the application (CFSS-2020). The company is mandatorily required to provide proof of withdrawal of the appeal.

 

 

Relevance of Immunity Certificate:

On the basis of the declaration given in e-form CFSS -2020, the Designated Authority[4] will issue an Immunity Certificate. The immunity provided under the Scheme is only with respect to any penalty in relation to the non-filing of such form or document with the Registrar and the defaulting company is not protected from any consequential proceedings including any interest of shareholder or director etc. It is pertinent to note that the immunity certificate is not granted automatically but is subject to scrutiny and only after the document is taken on record or approved by the Registrar, as may be applicable.

Upon issue of the immunity certificate, the defaulting company gets protection from any penalty for such non-filings. Further, the designated authority will withdraw the prosecutions before any courts and proceedings pending before adjudicating authority in respect of which the immunity has been granted, which is deemed to be completed without any further action by the designated authority. It is pertinent to note that, immunity cannot be availed in the following circumstances:

  • In case any management disputes of the company are pending before any court of law or tribunal;
  • In case any court has ordered conviction in any matter, or an order imposing penalty has been passed by an adjudication authority under the Act, and no appeal has been preferred against such order before the commencement of the Scheme i.e. on or before 30th March, 2020.

The only remedy which has been provided for a circumstance under point (ii) above is in a situation wherein an appeal under Section 454 (6)[5] is not filed before a regional director for an order passed by the Registrar and the last date of filing appeal falls between 1st March 2020 to 31st May 2020. In such a case, there is an extension in time by 120 days for the company to file an appeal. Furthermore, during such grace period, no prosecution will be initiated against the company or its officers for non-compliance of an order of the adjudicating authority in so far as it pertains to non-filing of forms or documents.

 

Analysis of the Scheme:

While on one hand, it is noted that the Scheme provides benefits to the defaulting companies, at large, to make the filings of documents, forms, and returns which are pending for filing, the Scheme also entail other benefits as explained below:

  1. Inactive Companies- This is a good opportunity for all the defaulting inactive companies to file all their pending forms and returns at normal fees instead of the hefty additional fees of ROC and also file an application for immunity in E- Form CFSS-2020. The company can subsequently file for either Form MSC-1 to obtain the status of Dormant Company under Section 455 of the Act or file Form STK-2 for striking off the name of company under Section 248 of the Act.
  1. Directors whose DIN are deactivated due to non -filing of KYC forms-The Scheme gives an opportunity to those Directors whose DIN were deactivated due to non-filing of Form DIR-3 KYC. Those Directors can activate their DIN after filing their pending KYC forms at normal fees.
  1. Filing of annual return: The Scheme also gives companies, who have not complied with the annual return filing requirement, an opportunity to rectify the same. Further, a company that has been struck off due to non-filing of annual returns, may apply for revival before the NCLT and thereafter obtain approval for revival and then take benefit under the Scheme.

Even considering these benefits, it may be noted that there are some shortfalls under the Scheme or areas wherein the Scheme needs to bring more clarity:

  • A defaulting company gets immunity only with respect to penalty for non-filing of the form/document and the immunity is applicable only upon scrutiny and form being approved (if applicable) and a certificate being issued by the Registrar. However, in the event the form is not approved by the Registrar or the immunity certificate is not granted, the benefit under the Scheme is not available and that means the defaulting company continues to be under default.
  • The Scheme expressly provides that the immunity will not be applicable in case where the adjudicating officer under the Act has already passed an order and it is not being appealed. Similarly, in the event, if an appeal is being filed by the defaulting company against an order, then in order for the company to claim benefit under this Scheme, the application has to be withdrawn. In this regard, it is pertinent to note that there is an inordinate delay in the withdrawal of cases from the appellate authorities.[6] Given the backlog of matters before the authorities and practical difficulties arising due to COVID-19 restrictions, it needs to be considered whether the timeline provided is practically sufficient for the defaulting companies to file for withdrawal and obtain a copy thereof and thereafter file for the benefit under the Scheme. Even considering the options for online application filing that has been provided by most forums such as NCLT because of COVID-19, companies could face difficulties in meeting the timeline. Further, in a situation where a defaulting company withdraws the appeal and files for immunity but the Registrar denies or refuses to grant immunity, there is no express clarity on whether it would affect the ability of the defaulting company to file for a fresh appeal or to what extent the defaulting company will face exposure under Section 454. Alternatively, the company may have to reserve the liberty to seek fresh appeal at the time of withdrawal, as per feasibility.  
  • While at one hand, the Scheme does provide benefit in rectifying non-compliances for forms such as Annual Returns, however, the benefit is not being provided for forms such as charge-related filings which carry heavy duties in terms of additional fees as well as the time limit for filing. Also, such forms if accepted for filing would have given greater protection to the secured lenders.

In light of the above, it may be noted that while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016, etc. However, it needs to be considered whether the benefits are in their true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

References 

[1] The Scheme defined a ‘Defaulting Company’ as a company defined under the Companies Act, 2013 and which has made a default in filing of any of the documents, statement, returns etc including annual statutory documents on the MCA 21 registry.

[2] Inactive Company means companies defined in Explanation (i) to sub-section (1) of section 455 of the Act, which deals with the definition of Dormant Company

[3] Vanishing Companies are those companies which raised funds from public through initial public offers (IPOs) and subsequently failed, inter-alia, to comply with the listing/ filing requirements of Registrar of Companies (ROC) and the Stock Exchanges for a period of two years and were not found at their registered office address at the time of inspection done by authorities / Stock Exchange.

[4] Designated Authority means the Registrar of Companies having jurisdiction over the registered office of the Company.

[5] Section 454 (6) requires an aggrieved person to file an appeal against the order of an adjudicating officer within 60 days from the order thereof.

[6] As per Government of India Ministry of Corporate Affairs Rajya Sabha Unstarred Question No. 1148 answered on Tuesday, the 6th March, 2018 regarding pending cases under the Companies Act, 2013: ‘9,004 number of applications have been filed as on date for withdrawal, out of which 4,066 number of cases have been withdrawn.’

 

 

Image Credits: Ayma Nejed from Pixabay

while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

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Relaxations to Listed Companies by SEBI in the Times of COVID 19

  • 13 May, 2020
  • Sheshashayee N S

The Hon’ble Delhi High Court unprecedented situation brought in by the COVID-19 global pandemic has thrown some difficult challenges both in the physiological and economical realm. Ensuring business continuity and sustenance has become a priority for the revival of the backsliding economy. While measures are being taken in individual level, governmental authorities and agencies across the globe are offering relaxations in strict compliance requirements to help organizations make through the current situation seamlessly. The Hon’ble Delhi High Court has suspended the operation of a public notice issued by the Controller General of Patents, Designs and Trademarks (CGPDTM) that had fixed the cut-off date (18.05.2020) for completion of various acts/proceedings, filings, payment of fees and other deadlines that had fallen due during this lockdown. The public notice was found to be contrary to the Supreme Court order which extended the period of limitation applicable to all proceedings before all Courts and Tribunals with effect from 15th March 2020 till further orders.

 

As expected, the Securities and Exchange Board of India (SEBI) started responding to this complex situation and giving some respite to Listed Companies through its first Circular dated March 19, 2020. Subsequently, several circulars have been issued extending dates for meeting compliance requirements. Relaxations provided by SEBI to Listed Companies are mainly in respect of complying with various obligations under SEBI (Listing Obligations and Disclosure) Regulations, 2015 (SEBI (LODR) Regulations, 2015) and circulars issued thereunder.

Common and Regular Compliance Obligations:

SEBI (LODR) Regulations, 2015 envisages that a Listed Company complies with various requirements such as the appointment of Share Transfer Agent for maintaining share transfer facility or maintaining such functions in-house. Listed Companies are required to send statements giving the number of investor complaints pending at the beginning of a quarter, those received during a quarter, disposed of during a quarter and those remaining unresolved at the end of a quarter to the recognized stock exchange. The compliances of this nature which are common and regular in nature are given more time to comply with. Similarly, compliance requirements regarding certificate for share transfer facility, statements of investor complaints, a certificate from practicing company secretary on the timely issue of share certificate, Corporate Governance Report and Shareholding pattern which were supposed to be submitted by April 2020 are given an extension of time until May 2020. 

SEBI (LODR) Regulations, 2015 also envisages that the Listed Companies are required to submit an annual Secretarial Audit Report along with its Annual Report. The SEBI (LODR) Regulations, 2015 also require submission of financial reports on a quarterly and annual basis to Stock Exchanges where they have listed their equity shares. In respect to the Secretarial Compliance Report and Financial Results, timelines were extended from May 2020 to June 30, 2020.

As we can observe from the above extension as of the date of March 19, 2020, the extensions have given a breathing time of nearly 45 days to Listed Companies.

Board Meetings, Committee Meetings and Annual General Meetings (AGM):

A Listed Company, in addition to regular compliances, is also required to hold four board meetings in a year with a maximum time gap of one hundred and twenty days (120) between two meetings. The condition that there should not be a time gap of 120 days between two Board meetings or Audit Committee meetings was also relaxed to an extent. If a Board meeting is held or proposed to be held between December 1, 2019, and June 30, 2020, then the relaxation from 120 days rule would be available to such listed companies. A similar rule is also made applicable for a Listed Company for holding Audit Committee meetings as they assist the Board to hold the mandated four meetings in a year. If the Audit Committee meeting is held or proposed to be held between December 1, 2019, and June 30, 2020, then 120 days rule would not be applicable between two Audit Committee meetings. But it is important to note that there are no exemptions from holding a minimum number of Board Meetings or Audit Committee meetings, which are four in a year.

In addition to Audit Committee, a listed company has various committees such as the Nomination and Remuneration Committee, Stakeholders Relationship Committee, and Risk Management Committee to serve the Board of Listed Company in order to carry on its functions. These Committees are required to hold a meeting at least once in a year. Time for conducting these Committee meetings such as Nomination and Remuneration Committee, Stakeholders Relationship Committee, and Risk Management Committee were extended up to June 30, 2020, vide Circular dated March 26, 2020.

Regulation 44 of the SEBI (LODR) Regulations, 2015 has put in place a higher expectation for top 100 Listed Companies by market capitalization in respect to holding of AGM and live one-way webcasting of proceedings of AGM. It requires them to hold AGM within a period of 5 months from the date of closing of the financial year. These top 100 Listed Companies shall be determined based on market capitalization as at the end of the immediate previous financial year. Accordingly, these companies need to hold their AGMs before May 31, 2020, or August 31, 2020, depending on the financial year followed i.e. Financial Year either ending on December 31, 2019, or March 31, 2020. This requirement is relaxed and time is extended up to September 30, 2020 to hold AGM.

Issuance of Debt Securities to Public or Post Disclosures:

A Listed Company intending to issue debt securities to the public is required to comply with SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and Circulars issued thereunder. In this regard one of the requirements is to submit audited financials that are no older than 6 months.  As though in line with the relaxation given for holding Board Meetings, vide Circular dated March 23, 2020, the requirements for Listed Companies intending to issue debt to the public were given exemption from submitting audited financials which are not older than 6 months and allowed them to do a public issue of debt by submitting unaudited financials with a limited review for such period.

Additionally, vide Circular dated March 23, 2020, relaxations were provided to Listed Companies which have already issued debt with respect to disclosures to be made by them. Timelines for making disclosures regarding financial results and disclosures to be made by large corporates were extended up to June 30, 2020.

Relaxations under Takeover Code:

SEBI had also relaxed disclosure to be made under Regulations 30(1), 30(2) and 31(4) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Regulations 30(1) and 30(2) contemplate disclosures regarding shareholding in a Listed Company on an Annual basis by promoters or shareholders holding 25% or more of the voting rights in the Listed Company. Similarly, under Regulation 31(4), promoters are also required to make a declaration that no encumbrance on shares held by them, other than that already disclosed is made by them. The disclosures which had to be made by March 31, 2020, maybe made before June 30, 2020. SEBI in its Circular dated March 27, 2020, has noted that travel restrictions and various other logistical challenges as reasons for granting such relaxations.

Relaxations Regarding Newspaper Publications:

SEBI has mandated publication of notification of Board Meetings, financial results notice to shareholders etc. in ‘Newspaper’ as per regulation 47 of the SEBI (LODR) Regulations, 2015. These publications seem to be made in order to disseminate information to especially those investors not having access to electronic mode and to enable the investors to make an informed decision on their investments. SEBI seems to have provided relaxation to publish in newspapers for events till May 15, 2020, in order to balance the interest of investors and compliance by Listed Companies. SEBI has also extended similar relaxations to Listed Companies which need to comply with regulation 52(8) of the SEBI(LODR) Regulations, 2015. Regulation 52(8) of SEBI (LODR) Regulations, 2015 requires Listed Companies that have listed NCDs or NCRPS to make similar “Newspaper” publications.

Postponing Implementation of Enforcement Mechanism:

More importantly, as a move to enforce the SEBI(LODR) Regulations, 2015, the penalty mechanism had been rationalized under the Circular dated January 22, 2020. SEBI has now decided to postpone the implementation of the Circular that provided for the imposition of stringent fines with respect to violations of SEBI (LODR) Regulations, 2020 until June 30, 2020. However, the Listed Companies should note that earlier Circular dated May 3, 2018, regarding penal provisions for violation of SEBI(LODR) Regulations, 2015 is still valid.

Miscellaneous Relaxations:

 

Vide Circular dated April 17, 2020, SEBI has also granted the following exemptions to Listed Companies.

  1. Penalty attracted for delayed reporting of share certificates and the issue of duplicate certificates from March 01, 2020, to May 31, 2020, under Circular dated May 3, 2018, is exempted.
  1. The obligation of prior intimation of Board Meetings required under Regulation 29 (2) to Stock Exchanges is reduced to 2 days from 5 days for meetings considering financial results. This exemption would be available for board meetings held till July 31, 2020, from the date of Circular i.e. March 27, 2020.
  1. Submissions that are allowed to be made to stock exchanges under SEBI (LODR) Regulations, 2020 may be done using digital signature certifications until June 30, 2020.

Conclusion:

As is evident from the above discussion, relaxations have been provided to Listed Companies with respect to timelines pertaining to common obligations, debt issues, meetings, disclosures, publication in newspapers, promoting digitalization by allowing Digital Signature Certificates and immunity from penalties arising under SEBI (LODR) Regulations, 2015.

Although these relaxations seem to be a calibrated attempt to help Listed Companies comply in difficult times, it cannot be denied that it would adversely affect investor’s interests. The regulatory body seems to be doing a balancing act between the needs of Listed Companies and the interest of investors.  

However, as uncertainties around the cure of the COVID 19 Pandemic continue, it is not clear if these exemptions would be extended for further time. Nonetheless, it is felt that SEBI should embrace digitalization and extend filings to be made using Digital Signature Certificates beyond June 30, 2020, which is largely the case with other regulatory bodies.

 

 

Image Credits:  Alec Favale on Unsplash

while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

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A legal Analysis of the Companies Fresh Start Scheme-2020

  • 7 May, 2020
  • Anjali Haridas
  • Richa Mishra

To mitigate the economic hardship caused due to COVID-19 pandemic and to facilitate ease of doing business, various efforts are being made by the Government of India. In furtherance of these initiatives, the Ministry of Corporate Affairs (“MCA”) has brought about certain relaxations for companies vide its general circular no. 13/2020 dated 30th March 2020 (“Circular”). The relaxation enables companies to regularize compliance-related filing with the Registrar of Companies ( “Registrar”).

The Companies Act, 2013 (and erstwhile 1956 Act) (‘hereafter the ‘Act’) stipulates various mandatory filings for companies, and in case of failure in adherence, penal provisions are attracted in most instances.  It is observed from the list of ‘defaulter companies’ provided under the official website of the MCA that there is a substantial increase in the number of non-compliances by companies. The defaults are mostly caused due to difficulties in understanding the applicability of a provision or due to paucity of time. This leads to a large number of companies being unable to file the required forms and returns with the Registrar within the stipulated time and thereby resulting in being in default under the Act.

In order to lighten the burden of the defaulting companies[1], the MCA has brought out the Companies Fresh Start Scheme, 2020 (hereafter referred to as the “Scheme”), whereby companies have been provided with the flexibility to fulfill pending filing compliances. The Scheme thereby condones the delay in filing the documents, forms, and returns with the Registrar without payment of any additional fees.

 

Applicability of the Scheme:

The Scheme has been promulgated by the MCA under Section 460 read with Section 403 of the Act, which empowers the Central Government to expressly condone the delay in filings with the Registrar.

The Scheme is applicable to all defaulting companies whose documents, returns, or forms are pending for filing as of the date of the notification of the Scheme. The benefits under the Scheme are available to both domestic companies registered under the Act as well as foreign companies. The Scheme also gives an opportunity to Inactive Companies[2] to get their companies declared as a ‘dormant company’ under Section 455 of the Act by filing a simple application on payment of the normal fee. The said Scheme is effective from 01st April, 2020 and is valid till 30th September, 2020.

However, it may be noted that the Scheme is not applicable in the following cases:

  1. Where a final notice for striking off the name of the company under Section 248 of the Act has already been issued by the designated authority.
  2. Where a company has Suo-moto applied for striking off the name of the company from the register of companies.
  3. Where a company is amalgamated under the scheme of compromise and arrangement under the provisions of the Act.
  4. Where the company had applied for dormant status under Section 455 of the Act before the introduction of the Scheme.
  5. For Vanishing Companies[3].
  6. For documents related to increasing in Authorized Share Capital (Form SH-7).
  7. For charge-related documents i.e. Form CHG-1, CHG-4, CHG-8, and CHG-9.
 
 

The Process under the Scheme:

The Scheme stipulates that every defaulting company will be entitled to make the belated filing by paying only the normal fees as prescribed under Companies (Registration office and Fees) Rules, 2014 for filing of all such belated forms, returns, and documents, and no additional fees is required to be paid. After filing the pending document under the Scheme, the defaulting company is required to file e-form CFSS-2020 on the MCA website, without paying any fees thereon, giving brief details of the belated forms which have been filed by it. It is pertinent to note that the defaulting company is required to file the e-form CFSS-2020 within 6 months from the closure of the Scheme i.e. it has to be filed between 01st October 2020 and latest by 31st March 2021 in order to claim immunity under the Scheme.

If a defaulting company has filed an appeal against any notice, complaint, the order passed by the court or by an adjudicating authority, it can file an application under this Scheme for immunity certificate only after withdrawing such appeal and furnishing proof of such withdrawal with the application (CFSS-2020). The company is mandatorily required to provide proof of withdrawal of the appeal.

 

 

Relevance of Immunity Certificate:

On the basis of the declaration given in e-form CFSS -2020, the Designated Authority[4] will issue an Immunity Certificate. The immunity provided under the Scheme is only with respect to any penalty in relation to the non-filing of such form or document with the Registrar and the defaulting company is not protected from any consequential proceedings including any interest of shareholder or director etc. It is pertinent to note that the immunity certificate is not granted automatically but is subject to scrutiny and only after the document is taken on record or approved by the Registrar, as may be applicable.

Upon issue of the immunity certificate, the defaulting company gets protection from any penalty for such non-filings. Further, the designated authority will withdraw the prosecutions before any courts and proceedings pending before adjudicating authority in respect of which the immunity has been granted, which is deemed to be completed without any further action by the designated authority. It is pertinent to note that, immunity cannot be availed in the following circumstances:

  • In case any management disputes of the company are pending before any court of law or tribunal;
  • In case any court has ordered conviction in any matter, or an order imposing penalty has been passed by an adjudication authority under the Act, and no appeal has been preferred against such order before the commencement of the Scheme i.e. on or before 30th March, 2020.

The only remedy which has been provided for a circumstance under point (ii) above is in a situation wherein an appeal under Section 454 (6)[5] is not filed before a regional director for an order passed by the Registrar and the last date of filing appeal falls between 1st March 2020 to 31st May 2020. In such a case, there is an extension in time by 120 days for the company to file an appeal. Furthermore, during such grace period, no prosecution will be initiated against the company or its officers for non-compliance of an order of the adjudicating authority in so far as it pertains to non-filing of forms or documents.

 

Analysis of the Scheme:

While on one hand, it is noted that the Scheme provides benefits to the defaulting companies, at large, to make the filings of documents, forms, and returns which are pending for filing, the Scheme also entail other benefits as explained below:

  1. Inactive Companies- This is a good opportunity for all the defaulting inactive companies to file all their pending forms and returns at normal fees instead of the hefty additional fees of ROC and also file an application for immunity in E- Form CFSS-2020. The company can subsequently file for either Form MSC-1 to obtain the status of Dormant Company under Section 455 of the Act or file Form STK-2 for striking off the name of company under Section 248 of the Act.
  1. Directors whose DIN are deactivated due to non -filing of KYC forms-The Scheme gives an opportunity to those Directors whose DIN were deactivated due to non-filing of Form DIR-3 KYC. Those Directors can activate their DIN after filing their pending KYC forms at normal fees.
  1. Filing of annual return: The Scheme also gives companies, who have not complied with the annual return filing requirement, an opportunity to rectify the same. Further, a company that has been struck off due to non-filing of annual returns, may apply for revival before the NCLT and thereafter obtain approval for revival and then take benefit under the Scheme.

Even considering these benefits, it may be noted that there are some shortfalls under the Scheme or areas wherein the Scheme needs to bring more clarity:

  • A defaulting company gets immunity only with respect to penalty for non-filing of the form/document and the immunity is applicable only upon scrutiny and form being approved (if applicable) and a certificate being issued by the Registrar. However, in the event the form is not approved by the Registrar or the immunity certificate is not granted, the benefit under the Scheme is not available and that means the defaulting company continues to be under default.
  • The Scheme expressly provides that the immunity will not be applicable in case where the adjudicating officer under the Act has already passed an order and it is not being appealed. Similarly, in the event, if an appeal is being filed by the defaulting company against an order, then in order for the company to claim benefit under this Scheme, the application has to be withdrawn. In this regard, it is pertinent to note that there is an inordinate delay in the withdrawal of cases from the appellate authorities.[6] Given the backlog of matters before the authorities and practical difficulties arising due to COVID-19 restrictions, it needs to be considered whether the timeline provided is practically sufficient for the defaulting companies to file for withdrawal and obtain a copy thereof and thereafter file for the benefit under the Scheme. Even considering the options for online application filing that has been provided by most forums such as NCLT because of COVID-19, companies could face difficulties in meeting the timeline. Further, in a situation where a defaulting company withdraws the appeal and files for immunity but the Registrar denies or refuses to grant immunity, there is no express clarity on whether it would affect the ability of the defaulting company to file for a fresh appeal or to what extent the defaulting company will face exposure under Section 454. Alternatively, the company may have to reserve the liberty to seek fresh appeal at the time of withdrawal, as per feasibility.  
  • While at one hand, the Scheme does provide benefit in rectifying non-compliances for forms such as Annual Returns, however, the benefit is not being provided for forms such as charge-related filings which carry heavy duties in terms of additional fees as well as the time limit for filing. Also, such forms if accepted for filing would have given greater protection to the secured lenders.

In light of the above, it may be noted that while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016, etc. However, it needs to be considered whether the benefits are in their true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

References 

[1] The Scheme defined a ‘Defaulting Company’ as a company defined under the Companies Act, 2013 and which has made a default in filing of any of the documents, statement, returns etc including annual statutory documents on the MCA 21 registry.

[2] Inactive Company means companies defined in Explanation (i) to sub-section (1) of section 455 of the Act, which deals with the definition of Dormant Company

[3] Vanishing Companies are those companies which raised funds from public through initial public offers (IPOs) and subsequently failed, inter-alia, to comply with the listing/ filing requirements of Registrar of Companies (ROC) and the Stock Exchanges for a period of two years and were not found at their registered office address at the time of inspection done by authorities / Stock Exchange.

[4] Designated Authority means the Registrar of Companies having jurisdiction over the registered office of the Company.

[5] Section 454 (6) requires an aggrieved person to file an appeal against the order of an adjudicating officer within 60 days from the order thereof.

[6] As per Government of India Ministry of Corporate Affairs Rajya Sabha Unstarred Question No. 1148 answered on Tuesday, the 6th March, 2018 regarding pending cases under the Companies Act, 2013: ‘9,004 number of applications have been filed as on date for withdrawal, out of which 4,066 number of cases have been withdrawn.’

 

 

Image Credits: Ayma Nejed from Pixabay

while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

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