ABSTRACT
The assent by the President to the Companies (Amendment) Act, 2020 is an important move by the Indian government in simplifying the corporate laws and making the country a business-friendly location. One of the pillars of the amendment is the decriminalisation of a lot of minors, technical, and procedural offenses as per the Companies Act, 2013. These defaults are redefined as civil wrongs which are punishable by monetary fines which are executed under In-house Adjudication Mechanism (IAM). Other major provisions are the adoption of a new Chapter XXIA connected with Producer Company, the permission of direct listing of securities of Indian companies in their authorized foreign jurisdiction, the permission of allowing certain classes of unlisted companies to prepare and file periodical financial outcomes, and the flexibility of Corporate Social Responsibility (CSR) requirements. The net movement is aimed to promote voluntary adherence and make the corporate environment more active through decreased intimidation of criminal prosecution in relation to technical violations.
KEYWORDS
Companies (amendment) bill, 2020; Decriminalization of offences; ease of doing business; corporate law reform; corporate governance; CSR flexibility; in-house adjudication mechanism (IAM); direct listing in foreign jurisdictions; producer companies.
INTRODUCTION
A traditionally tough regulation attitude in India was replicated in The Companies Act, 2013, which initially had 134 sections of criminal liability. This disciplinary system implied that any technical or procedural non-compliance may attract criminal charges, which would cause prolonged court hearings, overworked courts, and a chilling incentive on business and capital. Over the past few years, the Government of India has undertaken a vigorous reform agenda in the quest to modernise the legal framework to significantly enhance the position of the country in Ease of Doing Business index by the World Bank. This project is supported by the transition to a more trust-based governance, whereby compliance wrongdoing is not criminalised but rather voluntary compliance is promoted by a civil enforcement system.
The proposed changes started with the constitution of the Company Law Committee (CLC) in September 2019. The CLC, headed by Mr. Injeti Srinivas was tasked with the mandate, in another move to decriminalise further the Companies Act, 2013, and it recommended measures on the principle that serious violations, such as fraud, would continue to be criminal, and those that were either procedural or technical breaches, that would not create fraud or harm to the public, should instead come under civil jurisdiction. In November 2019 the CLC made its recommendations and, in March 2020, the Companies (Amendment) Bill, 2020, was introduced. Presidential assent to the Bill was given on September 28, 2020, making it the Companies (Amendment) Act, 2020. This act is a follow up to the previous acts which had already transformed 16 criminal offences into civil wrongs like the Companies (Amendment) Act, 2019.
Decriminalisation/Rationalisation of the Crimes:
The main characteristic of the 2020 Act is that the criminal prosecution is reserved only in the case of serious crimes against fraud, and the decriminalisation of the procedural or technical nature of offenses is carried out. The CLC reviewed 66 unaddressed compoundable offences and suggested reform to 43 criminal statutes, such as transferring 23 offences into the In-house Adjudication Mechanism (IAM) model.
Change to In-house Adjudication Mechanism:
Minor defaults are now addressed by the IAM Section 454, but in which a penalty is imposed by an adjudicating officer, without any court trial requirement. The IAM is operational, and thousands of cases are prevented in courts. Adjudication process is quite electronic in nature enabling companies to correct the defaults remotely.
Omission of Offences:
There were 7 compoundable offences that were left out completely. They may include default concerning a variation of the rights of shareholders (Section 48(5)) as well as failure to comply with the order of the Tribunal concerning rectifying the register of members (Section 59(5)).
Reduction of penalties:
The quantum of penalties was decreased in different spheres including: o The failure to submit the Annual Return Section 92(5), maximum penalty against the company was lowered by Rs. 5,000000 to Rs. 200000, against the officer maximum by 50000 to 100000. Inadvertent default in submitting resolutions or agreements Section 117, the highest penalty that can be imposed on the company was scaled down to 2,00,000,000 instead of 25,000,000,000. Omission to submit financial statements Section 137(3), of which the penalty on the company was limited to Rs. 10,00000, was decreased to 200000.
Penalty upgraded on Strategic offences:
The penalties on strategic provisions were, at the same time, boosted to discourage non-compliance. As an example, the penalty under Related Party Transactions Section 188(5) in a listed company was amended to a penalty of the amount of Rs 25 Lakh as compared to imprisonment or fine to the extent of 5 Lakh.
Corporate Governance and Capital Markets Improvements:
The amendment permits the Central Government to permit some types of public companies to issue and list securities on authorized stock exchanges in authorized foreign jurisdictions Insertion of Section 23(3). This is considered to be an aggressive action to liberalise capital markets and a greater pool of investors. Periodical Financial Results of Unlisted Companies These are periodical financial results that are required to be prepared and submitted to the Central Government by prescribed classes of unlisted companies Insertion of Section 129A.
The Central Government reduced the time that the company needs to have its name rectified (in case the name is the same or too similar to the name of an already existing trademark) to three months as opposed to six months. The term of non-compliance of the company Section 16(3) was replaced by giving the Central Government the power to assign a new name and instruct the Registrar to make the new name.
CSR Flexibility and Relief:
Set-off of Excess Spending: Firms may set-off any amount that it has spent above its CSR requirement and the amount that it is required to spend in future financial years (Insertion of third proviso in Section 135(5)).
Exception of CSR Committee: In circumstances where the amount the company is supposed to spend as per Section 135(5) is less than Rs 50 Lakhs, the condition of formation of CSR Committee will not apply and the duties will be performed by the Board of Directors.
Imprisonment up to three years on non-adherence to CSR provisions were eliminated Section 135(7. The fine was replaced with a money fine: twice the amount necessary to be paid into the Fund or to the company, and a tenth of the amount necessary or Rs 2 Lakhs (whichever is less) to the officer in default.
CONCLUSION
The Act has the immense effect of decriminalizing procedural and technical defaults which to a large extent ensure that litigation and legal predictability are greatly reduced which is a critical ingredient in improving investor confidence.
Decision to transfer minor offences to IAM framework enables businesses to deal with problems within a short period of time- sometimes just by paying a financial penalty- instead of being subjected to a lengthy criminal trial process, which is a time and financial waste. This administrative orientation to remediating the civil wrongs is a strong indicator of the ultimate goal of enhancing the ease of doing business. Moreover, the introduction of the idea of relaxing penalties to start-up companies and Producer Companies, as well as new flexibility in the requirements of CSR, will indicate that the government is eager to help small business and to promote voluntary compliance. In general, the 2020 Amendment has a more dynamic and globally competitive corporate environment, which can be described as a modernization of regulatory philosophy in India.
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WRITTEN BY Manisha Kunwar
