Topics Covered in this article
The Company Law Committee (hereinafter referred to as ‘CLC’) was constituted on 18th September 2019 in the backdrop of the government striving hard in its endeavor to facilitate ease of living for corporates in India, and for making some critical changes for the decriminalization of certain offences in furtherance of a similar step taken through the Companies (Amendment) Act 2019 (hereinafter referred to as ‘CAA 2019’). The CLC consisted of representatives from the Ministry, noted luminaries from the legal fraternity, professional institutes, industry players, etc. and it submitted its report on 14th November 2019. The Companies (Amendment) Bill 2020 (hereinafter referred to as ‘CAB 2020’) was introduced in the Lok Sabha on 17th March 2020. The article will focus upon the objectives of Companies Amendment Bill, 2000.
Objective of the Companies (Amendment) Bill 2020
The Bill had proposed certain amendments in the Companies Act 2013, primarily with a two-fold objective of:
- Decriminalizing certain defaults into civil wrongs and adopting a principle-based approach to remove the element of criminality from these defaults.
- Providing relaxation to corporates to enhance the ease of living.
The Law Committee Report highlighted the challenges created by a multiplicity of laws in India and suggested that where an offence under the Act is also dealt under another specialized legislation such offence may altogether be omitted from the Act. The Law Committee Report recommended the removal of defaults which fall within NCLT’s purview and could be resolved by the NCLT’s appellate or contempt jurisdiction.
Accordingly, CAB 2020 has proposed omission of 9 (nine) offences which relate to non-compliance with orders of the NCLT, i.e.,
- matters relating to winding-up of companies,
- default in the publication of NCLT order relating to the reduction of share capital,
- rectification of registers of security holders,
- variation of rights of shareholders and
- payment of interest and redemption of debentures.
Further, in relation to default by the company liquidator in matters relating to conduct of liquidation proceedings, CAB 2020 has proposed that such non-compliance of the Act be resolved in accordance with the Insolvency and Bankruptcy Code, 2016 (“IBC”). This amendment is aimed at consolidating the procedural matters relating to liquidation of companies under the IBC which has emerged as a comprehensive code in the matters of winding-up and liquidation.
Omission of imprisonment and recategorization of offences
CAB 2020 proposes to omit the punishment of imprisonment in relation to 23 (twenty-three) compoundable offences. The nature of monetary levy in each of these offences has been changed from a criminal ‘fine’ to a civil ‘penalty’.
Keeping in view the gravity of offences, a commensurate increase in the amount of penalty has been proposed for 3 (three) offences where the punishment of imprisonment is proposed to be omitted. These offences relate to non-compliances with provisions relating to contribution towards the corporate social responsibility (“CSR”) fund, related party transactions, and defaults in submission of material data or statistics to the central government.
These amendments are in furtherance of the objective of CAB 2020 to eliminate subjectivity in the adjudication process – which exists in such cases because the Act provides the adjudicating officer with the power to order either a punishment of imprisonment or impose a criminal fine, or both. Furthermore, the Act does not fix the sum of penalty upfront; instead, the adjudicating officer has the discretion to choose from a monetary range (minimum – maximum) prescribed under the Act.
Additionally, in an important move to reduce criminal actions arising from procedural non-compliances, 5 (five) offences which relate to delay in filing with the RoC or where default is discoverable by way of reviewing the company’s record or the MCA’s centralized online repository, have also been proposed to be moved to a system of monetary civil penalty only.
Rationalization of the amount of fines
CAB 2020 proposes to reduce the quantum of the monetary penalty associated with 22 (twenty-two) offences. The nature of the monetary levy in each of these cases is also proposed to be changed from a criminal ‘fine’ to a civil ‘penalty’. This category of the amendment is aimed at matters relating to maintenance of records by the companies such as, inter alia, failure to notify the RoC of alteration of share capital, non-compliance with the procedural requirements for the transfer of securities, failure to maintain registers of members, debenture-holders and other security holders, non-compliance in filing of annual return, failure in filing certain resolutions and agreements with the RoC, etc.
Decriminalization under key provisions of the Act
Set out below is a brief overview of the amendments proposed by CAB 2020 to penalties currently prescribed for defaults/non-compliances in relation to the following matters under the Act:
Public offer and offer document
CAB 2020 proposes to omit the punishment of imprisonment prescribed under Sections 26(9) and 40(5) of the Act in relation to contravention of provisions relating to public offering of securities by a company, which include, inter alia, matters to be stated in the prospectus and separate treatment of application money received pursuant to a public offer. However, the quantum of the monetary penalty under each of these provisions remains unchanged.
Note that the amendment proposed under CAB 2020 in this area will not dilute the risk of non-compliance in respect of the above-mentioned matters in so far as they can be treated as fraud under the Act. In addition, the penalties prescribed under the rules and regulations framed by the Securities and Exchange Board of India (“SEBI”) for any non-compliance with the above-mentioned matters, may also get attracted.
Buy-back of securities
CAB 2020 proposes to omit the punishment of imprisonment prescribed in Section 68(11) of the Act for non-compliance with procedure for buy-back prescribed under Section 68 of the Act, the rules framed thereunder and the SEBI (Buy-Back of Securities) Regulations, 2018. Both the defaulting company and the officer-in-default continue to remain liable for a monetary penalty between INR 100,000 to INR 300,000 for any non-compliance in respect of the manner of conducting a buy-back.
Significant beneficial owners
Section 90(10) of the Act provides for imprisonment as the punishment for a significant beneficial owner(s) of an Indian company (an “SBO”), who fails to make a timely disclosure of his interests to the company. CAB 2020 proposes not only to omit the punishment of imprisonment for such SBO, but also rationalize the quantum of monetary penalty. While the existing initial penalty of INR 10 Million is proposed to be substantially reduced to INR 50,000, the penalty for each day when the default continues is proposed to be reduced from INR 10,000 to INR 1,000 (subject to a maximum of INR 200,000).
Under Section 90(4) of the Act, the Companies are also required to file the details received from their SBO with the RoC, and failure to do so within the stipulated timeline could attract penalty extending up to INR 5 Million for both the company and the officer-in-default. CAB 2020 has proposed the reduction of the quantum in this penalty such that: (i) the penalty for the defaulting company is capped at INR 100,000 and INR 500 (subject to a maximum of INR 500,000) for each day when the default continues; and (ii) the penalty for the officer-in-default is capped at INR 250,000 and INR 200 (subject to a maximum of INR 100,000) for each day when the default continues.
The above-mentioned proposed amendments indicate that CAB 2020 has distinguished between the liability of a company and its officers, and duly recognized that the financial liability of an officer-in-default should be less than that of the company.
Financial statements of companies
CAB 2020 proposes to omit the punishment of imprisonment prescribed in Section 134(8) of the Act for contravention of the provisions relating to preparing and approving financial statements, the auditor’s report, and the board report. Further, the monetary penalty under this provision has been proposed to be reduced from INR 2.5 Million to INR 300,000 for defaulting companies, and from INR 500,000 to INR 50,000 for the officer-in-default, i.e., almost 1/10th of the existing penalty.
Furthermore, the penalty in Section 137(3) of the Act for a delay in filing the financial statement with the RoC has been proposed for rationalization. The penalty for defaulting companies is proposed to be reduced from a maximum of INR 10 Million to INR 200,000 and from a maximum of INR 600,000 to INR 60,000 for the officer-in-default.
Corporate social responsibility
Section 21 of the CAA 2019 had proposed a punishment of imprisonment for a period up to 3 (three) years if a company fails to meet its obligations under Section 135(5) of the Act to make the minimum CSR contribution or transfer its unspent CSR account or a fund approved under Schedule VII of the Act (a “CSR Fund”). CAB 2020 has proposed to omit such punishment of imprisonment.
However, CAB 2020 has proposed to replace the fixed monetary penalty with an ad-valorem penalty, the quantum of which is connected to the company’s minimum CSR spend obligations. Therefore, a company’s risk liability in this matter may either increase or decrease depending upon its profitability in a particular financial year.
CAB 2020 has proposed that:
- in case of defaulting companies, the maximum penalty should be either twice the amount required to be transferred by the company to the CSR Fund, or INR 10 Million; and
- in case of the officers-in-default, the maximum penalty should be one-tenth of the amount required to be transferred by the company to the CSR, or INR 200,000, in each case, whichever is lesser. CAB 2020 has also classified the nature of such fine as civil penalty.
Appointment and qualification of directors
CAB 2020 proposes to omit the punishment of imprisonment prescribed under Section 167(2) of the Act in respect of a director who continues to hold office despite being disqualified from it and the office being declared vacant. While the Act allowed for the monetary penalty to be as low as INR 100,000, CAB 2020 has proposed to fix the penalty at the higher amount of INR 500,000.
CAB 2020 has also proposed to reduce the quantum of per day penalty from INR 5,000 to INR 2,000 if there is a default committed by a person in holding more than the maximum permissible directorships in companies in India (i.e., 20) in accordance with Section 165(1) of the Act.
Related party transactions
CAB 2020 proposes to omit the punishment of imprisonment extending to a period of 1 (one) year, in the event a listed company enters into a related party transaction in contravention of Section 188 of the Act. The Act did not prescribe the punishment of imprisonment in case of such contravention by unlisted companies.
However, given the sensitivity of the offence, the quantum of the fine in case of listed companies is proposed to be increased five-fold i.e., from INR 500,000 to INR 2.5 Million. In case of unlisted companies, the lower range of penalty, i.e., INR 25,000, has been removed and the penalty has been proposed to be fixed at INR 500,000.
Oppression and mismanagement
CAB 2020 proposes to omit the punishment of imprisonment for a period of up to 6 (six) months currently prescribed under Sections 242(8) and 243(2) of the Act for matters relating to: (i) amendment of its constitutive documents by a company in contravention of an order of the NCLT; and (ii) a director or officer-in-charge who continues to hold office in a company in contravention of an order of the NCLT, respectively.
However, in each of the above cases, the monetary penalty for the officer-in-default is proposed to be fixed at INR 100,000 (thereby eliminating the lower threshold of INR 25,000), and INR 500,000, respectively. The penalty for defaulting companies remains unaltered
Decriminalization of certain offences
Under the Companies Act 2013, the offences can be classified into three types on the basis of penal provisions prescribed for them. The categories are offences attracting only civil liability, compoundable offences, and non-compoundable offences. CLC was appointed with the objective of reviewing the compoundable and non-compoundable offences and propose re-categorization for the purpose of removing the element of criminality from offences in which public interest is not harmed.
The CAA 2019 re-categorized 16 offences into civil defaults to rationalize the punishments prescribed under the Act as the original Act had provisions to impose criminal sanctions even for minor, technical or procedural non-compliances, which was problematic. Pursuant to this reform, CAB 2020 has proposed to decriminalize 54 compoundable offences. The vision behind this is a ‘test of objective determination’. Also, when there is no fraud and when the public interest at large is not affected at all, a criminal sanction might not be at par with the gravity of the offence.
In the cases of the first category, i.e., offences attracting only civil liability, the default or the wrong is devoid of intention (mens rea), which is a necessary element for the ascertainment of criminality. So, the offences which can be prima facie tested by objective evaluation should not attract criminal liability and must be re-categorized as civil offences. The punishment for the same must also be rationalized, and it is also an objective of CAB 2020. The punishment of imprisonment has been proposed to be omitted in relation to 23 compoundable offences, and the monetary amount has been changed from a ‘criminal fine’ to a ‘civil penalty’.
The proposal of decriminalization will help the companies save their goodwill which can get affected negatively when an element of criminality is attached to certain minor and technical defaults as aforementioned. It will also help in reducing the burden on special courts which have to deal with these cases. The negative effect it can have is that it can encourage the companies to take a less vigilant approach and not give due regard to the importance of these compliances. If this happens and the culture of defaulting in respect of these compliances is fostered, the legislative intent behind this bill will fail. Moreover, it is not entirely right to say that certain compliance does not affect the general public just because it is minor and technical.
Ease of Living to Corporates
The CAB 2020 has proposed an exhaustive list of amendments in the existing Companies Act in order to further its objective of enhancing the ease of living to law-abiding corporates. It takes into consideration the current issues faced by corporates due to existing compliance and other procedural requirements and proposes to provide relaxations on that front. Some of the major proposed amendments are discussed below:
- As discussed above, CAB 2020 provides for relaxation in the punishment for various offences by altering their nature, nature of punishment and penalty imposed. This shall reduce the fear of new entrants and provide impetus to businesses.
- The CAB 2020 contains a special chapter to be inserted for Producer Companies (companies involved in sale, manufacture and marketing of agriculture and cottage industry produce). The different characteristics of nature of these companies require a special set of regulations for them which has been done in the impugned bill. The relaxed procedural requirements dealing specifically with these companies and other associated benefits provided for them will enhance the agrarian economy.
- It also proposes the setting up of benches of NCLAT at places apart from Delhi along with doing away with the upper limit of 11 members. Two appellate tribunals (one recently established in Chennai) in the entire country leads to various practical problems and impediments in getting timely legal recourse. Setting up of additional NCLATs spread across the country will facilitate easy access to courts and reduce the burden, leading to speedier decisions and lesser pendencies.
- It provides for set-off for the amount which has been spent in excess of the amount required to fulfill its Corporate Social Responsibility, in the subsequent years. It proposes a strict penalty for non-compliance with the CSR requirements. However, the CAB 2020 does away with the requirements of setting up a CSR committee wherein the amount to be spent is below Rs 50 lakhs. In such cases, the functions of the committee are supposed to be discharged by the directors of the company itself.
- It further proposes relaxations on arising of any dispute of trademarks on substantially similar names or trademarks of the companies. The CAB 2020 though reduces time period to do so from 6 months to 3 months, now proposes to decriminalize the offence by the provision of a new alterable name by the Central Government on the advice of the ‘ROC’ followed by the issuance of a fresh certificate of incorporation on failure on the part of the company itself.
- It proposes to extend the payment of remuneration bestowed upon the executive directors by the Companies Act 2013, to include non-executive and independent directors leading to higher productivity due to the enhanced incentives.
- It proposes to exempt non-other banking and housing finance companies from the requirement of filing resolutions like for the granting of loans and security of loans. This is currently provided only to banking institutions.
- The CAB 2020 bestows numerous discretionary powers in the hand of the Central Government. The Central Government has the power to grant certain public companies permission to list certain securities in a foreign jurisdiction. This step can help the growth of start-ups. It can also, in consultation with SEBI, exclude companies from the category of “listed companies”. It also has been enshrined with the power to require certain unlisted companies to submit financial results for audit and review. Such discretionary powers leave scope for the arbitrary partisan actions on the part of the Central Government which is contrary to the objective of the CAB 2020.
In a time when India is making its mark on the economic vanguard, the proposals in this bill, if implemented, will surely help in forming a more structured corporate governance framework. It will help in boosting the confidence of stakeholders as they will not have to worry about the criminal sanctions; however, this will prove beneficial only if a culture of respecting and adhering to these compliances is maintained in good faith. The bill has very intelligently proposed to re-categorize only those compoundable offences in which mens rea is not there, and the test of objectivity is fulfilled, efficaciously leaving the (non-compoundable) offences in which decriminalization would not have been a smart move.
The relaxations proposed for corporates, as discussed above, will definitely help in enhancing and scaling up the ease of living thereby resulting in inclusive growth. The final form might also include various further amendments due to the change of situation in the wake of COVID-19 pandemic, and it will only be clarified when the parliament takes it up again or if an ordinance is promulgated in this regard.