Govt moves to decriminalise non-serious offenses under Companies Act

Days after the government agreed to decriminalise non-compliance with corporate social responsibility spending norms, the Ministry of Corporate Affairs (MCA) is planning to look at several other penal provisions in the Companies Act, 2013, and treat them as civil offences. Last July, the ministry had constituted a 10-member committee headed by Corporate Affairs Secretary Injeti Srinivas to review whether some offences could be decriminalised and handled through an in-house mechanism, which involves levying penalties in cases of default. The idea was to allow the clogged up trial courts to pay more attention to offences of a serious nature.

The panel's report, submitted last August, recommended re-categorising 16 offences - out of 81 in the category of compoundable offences, i.e. those punishable by fine and/or imprisonment - as defaults carrying civil liabilities under the above mechanism. These changes have been introduced through the Companies (Amendment) Act, 2019, which received President Ram Nath Kovind's nod on July 31.

Here are some of the biggest changes:

• Failure to file an annual return will now result in a penalty instead of a fine or imprisonment. Under Section 92 of the Companies Act, in case of non-compliance, the "company and its every officer who is in default shall be liable to a penalty of Rs 50,000". In case of continuing failure, a further penalty of Rs 100 for each day will be imposed subject to a maximum of Rs 5 lakh. Violating companies previously were punishable with fine between Rs 50,000 to Rs 5 lakh, and defaulting officials punishable with imprisonment up to six months and/or an equivalent fine.
• Non-compliance with Section 53 of the Companies Act, which prohibits issuance of shares at a discount, is now punishable only with a fine instead of a penalty or imprisonment. Earlier, the company was liable to a penalty equal to the amount raised through the issue of shares at a discount or Rs 5 lakh, whichever was less. The company was also liable to refund all monies received with interest at the rate of 12 per cent per annum to the shareholders.
• Any person guilty of wilfully furnishing false or incorrect information - or knowingly suppressing any material information - in accordance with the provisions of Section 77 would be liable for action under Section 447, which covers fraud. As per Section 77, every company creating a charge within or outside India, on its property or assets or any of its undertakings, has to register the particulars of the charge with the Registrar within thirty days of its creation. The Act defines a charge as an interest or lien created on the assets or property of a company or any of its undertaking as security.
• Under Section 447, the penalty for frauds involving amounts of at least Rs 10 lakh or one per cent of the turnover of the company (whichever is lower) and those that do not involve public interest has been increased to Rs 50 lakh from Rs 20 lakh. Previously, violators were also punishable with a jail term of anywhere between 6 months and 10 years.
• A new Section 454A has been introduced to tackle repeat offences. The penalty for second or subsequent default within a period of three years, whether by a company or corporate employees, is pegged at "an amount equal to twice the amount of penalty provided for such default under the relevant provisions" of the Companies Act.

The government is now planning to expand the list to cover all but the most serious offences. The MCA is reportedly mulling decriminalising as many as 65 sections under the category of compoundable offences. According to sources, this was indicated in a recent meeting between industry-corporate giants and senior government officials.

Also read: Insolvency law amendments to ensure greater timeliness: Nirmala Sitharaman

Also read: Working Session