Legal Capsule: Governance in the time of COVID - article from J. Sagar Associates

RECKONER ON THE CHANGE IN COMPLIANCE REQUIREMENTS IN TIMES OF COVID

Bhargavi Ravi, Senior Associate

With the single mindedness of a conquering army, COVID-19, continues to sweep through the world, punishing countries that consistently underinvested in their public health infrastructures. While we grapple in India with this evolving situation, as part of a holistic approach towards easing the burden of lockdowns, in addition to a slew of measures aimed at individuals, several Indian regulators have announced relaxations in compliance burdens to help companies and economies weather the pandemic.

This article seeks to explain some key regulatory decisions taken by the Ministry of Corporate Affairs and the Securities and Exchange Board of India, as of 01 April 2020, that will have an impact on the corporate governance compliances of businesses[1].

1.      Relaxation of Board meeting requirements:

On 18 March 2020, the MCA issued a notice granting in-principle approval for relaxation of the requirement of physical presence of directors in board meetings until 30 June 2020. On 19 March 2020, the MCA formally amended the Meeting Rules to reflect the relaxation. The statute governing Companies amended in 2013 permitted directors to attend board meetings through video/audio-visual conference and further permitted that attendance through video/audio-visual conference would countas quorum. However, the Rules (Meeting Rules, 2014) required that certain enumerated matters not to be dealt with in any meeting held through video conferencing unlessa quorum of directors is physically present. This Rule has now been relaxed by the MCA.

The matters the Rule required physical presence of quorum pertain to (1) the approval of the annual financial statements;  (2) the approval of the board’s report;  (3) the approval of the prospectus;  (4) the audit committee meetings for consideration of financial statement (including consolidated financial statement if any), to be approved by the board; and  (5) the approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

2.      Relaxation on gap between two Board meetings:

The Companies Act requires that there shall be no more than 120 days’ gap between two successive board meetings. On 24 March 2020, the MCArelaxed this requirement by a further 60 days, until 30 September 2020. Therefore, the interval between 2 board meetings can now extend up to 180 days.

3.      Relaxation of Independent Director meeting requirements:

Schedule IV of the Act requires independent directors of a Company to meet at least once each year without the presence of the non-independent directors. The requirement of a physical meeting of independent directors has been dispensed with for financial year 2019-20, so the non-occurrence of such a meeting will not be considered a violation.

4.      The Companies Fresh Start Scheme, 2020:

This Scheme was introduced by the Ministry of Corporate Affairs (“MCA”) on 30 March 2020 vide General Circular 12/2020, with the aim of easing the compliance burden of law abiding companies, which are reeling under the uncertainty induced by COVID.

• The Companies Fresh Start Scheme (“CFSS”) comes into effect on 01 April 2020 and shall remain in force until 30 September 2020 (“Scheme Period”).
• During the Scheme Period, the MCA will condone all delays in filing forms. 
• For each belated form that is filed, the defaulting company will only be required to pay the regular fees prescribed by the Companies (Registration Offices and Fees) Rules, 2014.
• No late fees or penalties will be imposed.
• Companies can seek immunity from prosecution for belated documents filed under this scheme (by filing Form CFSS-2020)
• Form CFSS 2020 shall be filed within 6 months from the closure of the Scheme, i.e., the form seeking immunity shall be filed between 01 October 2020 and 31 March 2021.
• No immunity will be given for (a) prosecution on grounds not related to delays; (b) shareholder or management disputes; (c) orders of conviction passed by a court or tribunal against which no appeal has been filed; or (d) matters where appeals are pending before a court of law (unless the appeal is withdrawn before filing for immunity).
• The CFSS also permits inactive companies with defaults in filings to apply for dormant status/striking off. 

5.      LLP Settlement Scheme 2020:

The LLP Settlement Scheme 2020 was modified on 30 March 2020, on the same lines as the CFSS above. The LLP Settlement Scheme has also been extended to 30 September 2020 and is structured to condone delayed filings.

6.      Spending on COVID combat efforts shall constitute valid CSR expenditure:

On 23 March 2020, the MCA, announced that corporate expenditure on fighting COVID-19 will constitute eligible CSR expenditure. This was followed by a clarification on 28 March 2020, when the MCA issued an Office Memorandum notifying that contributions to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund, or PM CARES Fund, which was established to handle the COVID-19 crisis, shall constitute valid CSR expenditure.

CSR or Corporate Social Responsibility is the obligation laid on companies to spend a small portion of their income in giving back to the society to which they owe their existence and prosperity. Under Section 135 of the Companies Act, 2013, every company having net worth of INR 500,00,00,000 (Indian Rupees Five Hundred Crores) or more, or turnover of INR 1000,00,00,000 (Indian Rupees One Thousand Crores) or more or a net profit of INR 5,00,00,000 (Indian Rupees Five Crores) or more during 3 the immediately preceding financial years shall be required to spend at least 2% of its average net profits from the 3 preceding financial years towards CSR. Such companies are also required to set up a CSR Committee.

Schedule VII of the Act lists out the acceptable areas of CSR expenses. 

• Schedule VII (i) states that “Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water” are eligible CSR expenses. (emphasis supplied); and 
• Schedule VII (xii) notes that “disaster management, including relief, rehabilitation and reconstruction activities” is a valid CSR expense under the Act. 

Further, the MCA, through its General Circular No. 21/2014 dated 18 June 2014, has categorically stated that the activities mentioned in Schedule VII must be interpreted as liberally as possible. This, read with the MCA clarifications on 23 March and 28 March 2020, incentivises corporate expenditure to combat COVID-19. 

All contributions to the PM-CARES Fund before 31 March 2020, and all contributions on and from 01 April 2020 by companies that have chosen the old tax structure, will also be eligible for Section 80G deductions under the Indian Income Tax Act, 1961.

7.      Offsetting extra CSR expenditure on COVID:

On 01 April 2020, a message has been posted on MCA by the Secretary, Minister of Corporate Affairs, urging companies to contribute over and above the minimum amount towards CSR expenditure and permitting the set off of extra CSR spending against future obligations.

8.      Web Form CAR-2020:

In continuation of the above, in March 2020, the MCA introduced a purely voluntary filing through a web form called Company Affirmation of Readiness towards COVID-19 (CAR-2020). This is a simple web form that does not require digital signature or attachments. It is a statement from each company on whether it has a COVID-19 preparedness plan in place. There is no penalty attached to not having a preparedness plan, nor is the non-filing of the form penalised. As at the time of writing, 1,91,397 companies have filed their Form CAR-2020 signalling their readiness to face COVID head-on.

9.      Other relaxations:

Vide its General Circular 11/2020, the MCA also announced the following relaxations:.    

• The Companies (Auditor's Report) Order,2020 will now come into force only in financial year 2020-21, instead of the earlier planned 2019-20;
• Deadline for compliance with deposit repayment reserve requirements has been tended to 30 June 2020;
• Deadline for depositing/investing 15% of debentures maturing in specific time periods has been extended to 30 June 2020;
• Newly incorporated companies are allowed 360 days to file declaration for commencement of business (i.e., the time period has been doubled); and 
• Non-compliance with the resident director requirement for financial year 2019-20 is not considered a violation (since travel restrictions could have prevented a director from spending the requisite 182 days in India)

10.  Extension of Limitation Periods:

The Supreme Court of India took suo moto cognizance of the impact of COVID and passed an order on 23 March 2020, stating that, if the limitation period for any petition, application, suit or other legal proceeding expires on or after 15 March 2020, then such limitation period would stand extended until further orders are passed by the Court.Given that COVID containment measures would make it difficult, if not impossible, to participatein court proceedings, the Supreme Court took this laudable step of its own volition, thus protecting the rights of parties until COVID containment measures are eased sufficiently to permit a return to the judiciary.

The Securities and Exchange Board of India has also stepped up the compliance relaxations for listed entities during the COVID pandemic. On 19 March 2020, SEBI issued a circular (SEBI/HO/CFD/CMD1/CIR/P/2020/38) providing the following relaxations in filing timelines under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”):

Reg no.	Nature of filing	Frequency	Original due date	Relaxation period	Extended due date
7(3)	Compliance certificate on share transfer facility	Half yearly One month from the end of each half of    the financial year	30 April 2020	1 month	31 May 2020
13(3)	Statement of Investor complaints	Quarterly 21 days from the end   of each quarter	21 April 2020	3 weeks	15 May 2020
24A	Secretarial Compliance Report(Read with circular CIR/CFD/CMD1/27/2019 dated 08 February 2019)	Yearly 60 days from the end of the financial year	30 May 2020	1 month	30 June 2020
27(2)	Corporate Governance Report	Quarterly 15 days from the end of the quarter	15 April 2020	1 month	15 May 2020
31	Shareholding Pattern	Quarterly 21 days from the end of the quarter	21 April 2020	3 weeks	15 May 2020
33	Financial Results	Quarterly 45 days from the end of the quarter	15 May 2020	45 days	30 June 2020
		Annual 60 days from the end of Financial Year	30 May 2020	1 month	30 June 2020

11.  SEBI Relaxation in Meeting requirements:

SEBI has also relaxed the requirement to have no more than 120 days elapse between 2 successive board meetings vide its circular (SEBI/HO/CFD/CMD1/CIR/P/2020/38). It states that although the Board and Audit Committee must meet no less than 4 times each year, listed companies are exempted from the need to observe the stipulated time lapse of 120 days between 2 successive meetings. This concession applies only to meetings that are to be held between 01 December 2019 and 30 June 2020.

It is expected that these steps will ease the compliance burden on companies as they face multiple challenges in fighting COVID. In the long run, it is the hopethat these procedural relaxations are coupled with fiscal stimuli to help build economic resilience.

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