Streamlining the penalty regime under companies law

The Companies (Amendment) Bill aims at introducing a climate of compliance, without the fear of unfair prosecution

Companies law
The deliberations in all multilateral fora as well decades of experience of the ground realities have established that any lasting progress towards fulfilling the right to development require equitable economic relations and a favourable economic environment at the international level, apart from the national level policies.

The Companies Act, 2013, was made stringent against the backdrop of the Satyam scam, for all good reasons. However, some provisions have proven to be roadblocks in the path of doing business with ease in India. The Companies Law Committee, constituted last year, made a conscious call of conducting an extensive public consultation to collate the thorny issues in the functioning of companies. In February, the Committee released its report making multiple recommendations in the Companies Act, with the aim of easing doing business in India. This led to the introduction of the Companies (Amendment) Bill, 2016, in the Lok Sabha a month later. A significant proposal is the streamlining of penalty provisions throughout the Companies Act to make penalties commensurate with the gravity of the offence, by basing them on established principles of law.

The principles applied

The JJ Irani Committee Report and reports of the Standing Committee on the Companies Bill put out the principles to be applied for remoulding the penalty regime in the Act. It was considered imperative to make a distinction between procedural and substantive defaults, including fraudulent defaults, and have a different set of punishments.

It was recommended that factors such as size of the company, nature of business and injury to public interest should be given due consideration in determining the level of fine or imprisonment. Several global best practices were applied.

The proposed amendments

The provision of punishing ‘fraud’ under the Act was inserted, evident from the stringent penalty encapsulated in section 447. But blanket punishment in the absence of any threshold opened up avenues for misuse. This is sought to be pre-empted by making only frauds involving amounts of at least R10 lakh or 1% of the turnover of the company, whichever is lower, punishable under the section. Frauds involving amounts below the proposed limits and not involving public interest are to be made compoundable, as the cost of prosecution may exceed the amount involved in the fraud itself. Compounding of offences under the old Companies Act is proposed to be reinstated. This stems from the need to re-infuse the administrative leniency prevalent under the old Act so that the National Company Law Tribunal has the power to compound not only offences punishable with fine, but also those punishable with fine or imprisonment or both.

Relief has been provided to directors in terms of doing away with the minimum fine that had to be coughed up by them for any contravention of the provision requiring disclosure of interest in another company. In a significant move, where liability of a fine of merely R1,000 or more under the Companies Act could disqualify a person from being appointed as a managing or whole-time director or a manager, the threshold was proposed to be revised to R50,000, as per the report. But this amendment is not reflected in the Bill; it is hoped it finds place in the final version or in a separate notification. In a bid to rationalise the prescribed punishments for auditors, the fine payable by them for transgressions under the Act has been linked to their audit fees, and the persons to whom they are liable to pay damages for loss arising out of misleading or incorrect audit reports have been clarified.

In the age of start-ups, most jurisdictions have a separate and a liberal compliance and penalty regime for them, to create a robust business environment. Within the framework of the existing law, the Bill makes an attempt to provide relaxations to such companies in their compliance requirements; it also introduces two new sections to provide lower punishment for non-compliance. Section 446A enumerates certain factors that the courts will consider while determining the level of punishment—one being the size of the company—and section 446B proposes that the punishment, be it fine or imprisonment, shall not be more than half of the existing thresholds, for belated filing of company documents like annual returns, financial statements and resolutions by one-person companies and small companies. It has proposed that filing fees for all company documents to be filed by smaller companies be reduced by half. To encourage timely filing of important documents, if the filing is done within the prescribed period, the fees for all companies are proposed to be reduced to zilch. It is anticipated these amendments will appear in the relevant rules. However, to tackle the laxity of big companies in filing certain crucial documents, the filing fees are proposed to be enhanced and repeated defaults have been given a strict treatment.

A much needed breather to companies having small private placement offers or deposits is that, in case of a contravention of the relevant sections, they are required to pay a fine which is linked to the offer or deposit size, and not a fixed amount, as the latter generally exceeded the offer or deposit size itself. The recommendations and amendments relating to small companies are pertinent and contribute significantly to the Start-up India Action Plan.
Though forward dealing and insider trading regulations are relevant for listed firms, section 194 and 195—which prohibit and penalise forward dealings and insider trading—are seemingly applicable to all kinds of companies. To rectify this anomaly, the Committee has recommended deletion of said sections. The principle that procedural defaults should be subject to a lighter punishment than substantive defaults has been applied for reducing the punishment for contraventions of a procedural nature in relation to section 42 for private placements and contravention of section 117 relating to filing of resolutions.

A step in the right direction

In an ideal world, companies would be entirely compliant with the existing company law on their own volition without the threat of strict punishments. The corporate world being anything but ideal, the requirement of punishments under the law is indispensable. The Bill and the recommendations of the Committee are a step towards scripting a penalty regime under the Companies Act which is balanced and aims at inducing a climate of compliance, without the fear of unfair prosecution.

The author is a research fellow, Vidhi Centre for Legal Policy

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express Telegram Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Story
Inside track