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Governance Bytes: (Decriminalising Companies Act Offences)

Govt to decriminalise 2/3rds of offences under Companies Act – (Decriminalising Companies Act Offences)

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In News: (Decriminalising Companies Act Offences)

  • The Union government is all set to do away with jail term in over 40 of the 66 sections under the Companies Act 2013.
  • The ministry is also seeking to lower the penalty for small companies.

Decriminalising Companies Act Offences
Nirmala Sitharaman

News Summary:

  • The government is looking to introduce a bill to amend the companies law in the upcoming winter session of the parliament.
  • The steps are being discussed by the Company Law Committee, which is also looking at stringent deterrents for violators, without putting them in jail.
  • The changes, if implemented, is expected to benefit around 8 lakh of the 11 lakh registered Indian companies which have a turnover of up to Rs 2 crore and a paid-up capital of Rs 50 lakh or less.
  • The new amendments will allow companies and their executives to avoid persecution or jail term by paying up penalties.
  • Once the amendments are approved, civil offences will be dealt through Ministry of Corporate Affairs’ in-house mechanism led by the registrar of companies, with a handful to be decided by the courts.
NOTE: In the recently amended Companies Act, the government has already decriminalized 16 Sections, i.e. reduced the number of provisions that attracts the jail term from 81 to 66.

Background: Company Law Committee or Injeti Srinivas Committee

  • In September 2019, the government has constituted a 11-member company law committee, headed by corporate affairs secretary Injeti Srinivas.
  • Objective: To analyse and examine-
    1. Decriminalisation of certain offences under the Companies Act, 2013,
    2. Improving corporate compliance
    3. To improve the ease of doing business for law-abiding citizens.
  • The committee will submit its recommendations on offences (both compoundable and non-compoundable) which could be recategorized as ‘civil wrongs’ and suggest measures to optimise the compliance requirements under the Companies Act, 2013.
  • The committee is also looking into other key issues de-clogging the National Company Law Tribunals and measure to improve the functioning of statutory bodies under the Companies Act including the Serious Frauds Investigations Office (SFIO), The Investor Education and Protection Fund Authority (IEPFA) and the National Financial Reporting Authority (NFRA).
  • It will also examine the feasibility of introducing settlement mechanism, deferred prosecution agreement within the fold of the Companies Act, 2013.
  • The committee will also study the existing framework under the Limited Liability Partnership Act, 2008, and suggest measures to plug the gaps, if any, to enhance the ease of doing business.

The Companies (Amendment) Act, 2019: (Decriminalising Companies Act Offences)

  1. Re-categorization of certain Offences:
    • The Act has brought about 16 corporate offences under the ambit of civil liability, including failure to file annual returns and financial statements within a specified time frame, and issuance of shares at a discount.
    • These offences, which earlier attracted criminal proceedings against the offender, are now liable for a penalty.
  2. Corporate Social Responsibility (CSR):
    • The amended act mandates that, any unspent annual CSR funds of the companies must be transferred to one of the funds under Schedule 7 of the Act (e.g., PM Relief Fund) within six months of the financial year band disclose the reasons for non-spending in their annual report.
    • If the CSR funds are committed to certain ongoing projects, the company must transfer the amount to an unspent account with a scheduled bank within 30 days from the end of the financial year.
    • If the company fails to spend this amount, it must transfer it to one of the funds mentioned in Schedule 7 of the Act.
    • In case of any violation of the CSR provisions, the company is liable to a minimum penalty fee of INR 50,000 (US$700), which may extend to INR 25 lakh (US$35,034).
    • Further, every defaulting officer of the company may be liable to imprisonment for up to three years, or a fine up to INR 5 lakh (US $7,023), or both.
    • These changes effectively make CSR contribution mandatory for companies operating in India.
  3. Commencement of business:
    • The Act requires companies to file a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of Association (MoA) of the company has paid for the shares agreed to be taken by them.
    • The companies must also file documents stipulating the verification of their registered address with the Registrar of Companies (ROC) within 30 days of incorporation.
    • The Act empowers the RoC to take strict action against companies that fail to comply with these provisions and remove their name from the register of companies.
  4. Unfit persons not to manage companies:
    • If the government is of opinion that the affairs of the company are being conducted in a manner that is detrimental to public interest, it may itself apply to the National Company Law Tribunal (NCLT) for an order to prevent mismanagement and oppression in the company.
    • Under certain circumstances, the government may also initiate a case against an individual in the company and refer it to the NCLT for inquiries.
    • These circumstances may include among others fraud, misfeasance, persistent negligence, business not conducted with sound business principles or breach of trust.
  5. Associates of foreign companies may follow different financial year for accounting:
    • Previously, the Companies Act required all companies to follow financial year ending on March 31 of every year.
    • It only exempted companies or body corporates holding a company or a subsidiary of a company incorporated outside India to follow a different financial year for consolidation of its accounts outside India. Such companies could apply to the NCLT to allow them a non-March financial year end.
    • The amendments now extend this exception to associates of a foreign company as well as to a subsidiary of a foreign company that follows a different financial year.
    • Also, the companies can now make the application to the federal government rather than the NCLT – speeding up the time period for processing applications.
  6. Disgorgement of properties in case of corporate fraud:
    • In case of corporate fraud revealed by an investigation by the Serious Fraud Investigation Office (SFIO), the government may make an application to the NCLT to pass appropriate orders for the disgorgement or giving up of profits or assets of an officer or person or entity, which was obtained an undue benefit.

Also Read: Security Concerns: Government’s access to WhatsApp

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