Impact Analysis of Committee Recommendations on Offences under the Companies Act

[Gaurav Pingle is a practising Company Secretary in Pune and can be reached at [email protected]]

The Government of India had constituted a Committee to review the existing framework dealing with offences under the Companies Act, 2013 (‘Act’) and related matters. The Committee was also required to make recommendations to promote better corporate compliance. The Committee submitted its final report on 27 August 2018. This post contains an analysis of the principal recommendations of the Committee and its impact on India Inc.

The Committee has recommended re-categorization of 16 out of the 81 compoundable offences by shifting them from the jurisdiction of Special Courts to an in-house e-adjudication framework wherein defaults would be subject to levy of penalty by the authorised adjudicating officer (i.e. Registrar of Companies). It is proposed that these 16 minor compoundable offences would include failure to file timely resolutions and other declarations and also various non-serious and clerical errors, for which the companies will not have to go before the Special Courts. It would be important to understand the nature of the 16 compoundable offences. The Government shall in due course set-up e-adjudication framework for such offences.

Of the remaining 65 compoundable offences, the Committee has recommended that they continue to be dealt with under the jurisdiction of Special Courts due to their potential misuse. The Committee has also recommended status quo in respect of all non-compoundable offences, which relate to serious corporate offences. Another innovative recommendation of the Committee is instituting a transparent online platform for e-adjudication and e-publication of orders. The Committee has stated that necessitating a concomitant order for making good the default at the time of levying penalty would help achieve better compliance.

With an objective to unclog the National Company Law Tribunal, the Committee has recommended the following: (i) enlarging the jurisdiction of Regional Director with enhanced pecuniary limits for compounding of offences under section 441 of the Act, (ii) vesting in the Central Government the power to approve alteration in the financial year of a company under section 2(41) of the Act; and (iii) vesting in the Central Government the power to convert public companies into private companies under section 14 of the Act. In my view, this recommendation has been made by the Committee with an objective that the National Company Law Tribunals invest their time and efforts on matter relating to insolvency and bankruptcy, revival of de-registered companies, corporate restructuring, oppression and mismanagement, and the like. However, there should be prescribed guidelines for the Regional Directors to exercise such powers. The recommendation, if accepted, would require amendment to the Act and the Rules made thereunder.

With an objective to better tackle the concerns surrounding ‘shell companies’, the Committee has recommended re-introduction of the provisions relating to declaration of commencement of business. The Act was amended by Companies (Amendment) Act, 2015 and the provisions relating to declaration of commencement of business were eliminated. The amendment was introduced with an objective of ease of doing business. In my view, this amendment will not be able to address the concerns over ‘shell companies’, as such companies are identified as ‘shell companies’ after non-filing of returns and financial statements with Registrar of Companies. Re-introduction of ‘declaration of commencement of business’ may not serve the purpose of pursuing ‘shell companies’.

The Committee has also suggested greater disclosures with respect to public deposits, particularly in respect of transactions exempted from the definition of public deposits under section 76 of the Act to prevent abuse and harming of public interest. Under Rule 2(c) of the Companies (Acceptance of Deposits) Rules, 2014, certain prescribed amounts are not ‘deposits’ under the Act. Such ‘exempted deposits’ can be accepted by private companies and public companies. Since public interest is not involved in private companies, the necessary recommendations with respect to the disclosure and compliances for exempted deposits shall be applicable to public companies only.

The Committee has recommended a huge reduction in time-limit for filing documents related to creation, modification and satisfaction of charges and stringent penal provisions for non-reporting. On the most controversial topics of corporate laws in the recent times, the Committee has recommended that once a company obtains restrictions under section 90(7) of the Act relating to significant beneficial ownership, in respect of shares whose ownership remains undetermined, such shares should be transferred to Investor Education and Protection Fund if the rightful owner does not claim ownership within a year of such restrictions. In my view, it is very difficult to predict the expected compliance at an operational stage.

One of the most controversial topics in the recent past has been ‘disqualification of directors’. On this aspect, the Committee has recommended that holding of directorships beyond permissible limits will trigger disqualification of such directors. The recommendation, if accepted, will require amendment to section 164 of the Act. However, section 165 of the Act (relating to ‘number of directorships’) provides for calculation of directorships in private companies, public companies, and subsidiary or holding of private company, with exception to directorship in dormant companies. The moot question is how the Ministry of Corporate Affairs will monitor the directorships, changes in structure of companies (i.e. holding company / subsidiary company), and a dormant company.

The Committee has also recommended the imposition of a cap on independent directors’ remuneration in terms of percentage of income in order to prevent any material pecuniary relationship, which could impair his independence on the board of the company. This recommendation if accepted will require amendment to section 149 read with section 197 of the Act and the Rules made thereunder. Taking into consideration the contribution of independent directors, the time involved in preparing and attending Audit Committee meetings and board meetings, in my view, imposing cap on independent director’s remuneration would be unjust.

– Gaurav Pingle