India: Companies (Amendment) Ordinance 2018 – Govt Rationalizes Penalties

Introduction

Several committees stretching back to 2002 had observed that the erstwhile Companies Act, 1956 contained penalties which were rather nominal and easily compoundable. Hence, the Companies Act, 2013 (Act) deliberately made serious offences such as fraud etc., non-compoundable. Unfortunately, in the wake of Satyam and the season of scams, lawmakers fell into the trap of 'preventing' scams and overcorrected.

We had written earlier how after the enactment of the Companies Act, 2013 (Act), burdensome compliance and onerous reporting requirements became the 'new normal' for businesses in India. The Act was amended last year to liberalise where possible and harmonise the compliance requirements with other laws. However, stakeholders felt that there was further scope for recategorization of offences such that technical defaults / procedural lapses were treated as civil liabilities. A robust in-house adjudication mechanism would also help in de-clogging the National Company Law Tribunal (NCLT) which was now swamped with more pressing matters such as administering bankruptcy laws and resolving corporate debt.

In addition to the 'Ease of Doing Business', the Government has professed equal enthusiasm for cracking down on 'shell companies' purportedly used to launder 'black money'. To achieve these aims, the Central Government set up the Committee to Review Offences under the Companies Act, 2013 (Committee). Based on the Committee report, an ordinance to further amend the Act (Ordinance) was promulgated on 2 November 2018 to come into force at once.

The key changes brought about by the Ordinance are highlighted below.

  •  

'De-clogging' the NCLT

With the intent of easing the NCLT's caseload, the Central Government has been vested with the power to authorise the following, which may be further delegated to the registrar of companies or the regional director:

  •  

Change of financial year.

  •  

Conversion of public limited company to private limited company and vice versa.

  •  

Power to rectify the register of charges

Greater compounding powers

The pecuniary jurisdiction of the Regional Director for compoundable offences has been increased from INR 5 lakh to INR 25 lakh.

Earlier, the permission of the Special Court was required to compound offences where imprisonment was a discretionary component of the punishment.  As punishment for many such offences has now been confined to financial penalty, Section 441(6) has been amended to clarify the principle that offences where imprisonment is a mandatory component of the punishment (with or without fine) are not compoundable.

Some of the key offences that remain not compoundable are contraventions of Section 447 (punishment for fraud); Section 8 (formation of companies with charitable objects); Section 40 (Securities to be dealt with on stock exchange); and Section 90 (register of significant beneficial owners).

  •  

Crackdown on shell companies

Commencement of Business

Section 11 of the Act which was omitted in 2015 has been brought back as Section 10A. Henceforth, no company having a share capital can "commence any business or exercise any borrowing powers", unless:

  •  

a director files a declaration with 6 months of incorporation stating that every subscriber to the memorandum has "paid the value of shares to be taken by him"; and

  •  

a verification has been filed by the Company of its registered office within 30 days of incorporation in terms of Section 12(2) of the Act.

Where a director fails to file a declaration, the registrar, has been empowered to initiate the process for striking the name of company off the register.

Registered Office

New Section 12(9) has been inserted. Where a registrar has reasonable cause to believe a company is not carrying on business at its registered office, he may carry out an inspection and initiate the process for striking the name of company off the register.

  •  

Registration of Charges

Charges created on assets of a company are to be mandatorily registered within 30 days of their creation. As per the new provisos to Section 77, for charges created and not duly registered before 2 November 2018, an additional period of six months for registering the same with additional fees is available. Also, a 60 days' additional period is made available for charges created after 2 November 2018 and not duly registered, on payment of ad valorem fees. 

Further, Section 87 has been rewritten and the powers of the Central Government to rectify the register of charges have been restricted to situations where there is an omission or misstatement in respect of the intimation of payment or satisfaction of charge.

As a liquidator under the IBC is only obligated to take charges duly filed by a company with the registrar into account, timely reporting will greatly assist the corporate insolvency resolution process.

  •  

Significant Beneficial Ownership

Section 90 was revamped by an amendment to the Act last year and the new concept of 'significant beneficial owner' and related reporting requirements (by companies and shareholders) was introduced.

A duty was cast on natural persons being significant beneficial owners to disclose the nature of interest and register themselves with the company. Duty has also been cast on each company to give notice to persons whom it has reason to believe to be significant beneficial owners to come forward and register themselves. Where a response was not forthcoming, companies were empowered to apply to the NCLT, for an order seeking restrictions on transfer and suspension of all rights attached to the shares by such unregistered beneficial owners.

Aggrieved persons were given an open-ended right to approach the NCLT for relaxation or lifting of the restrictions. The Ordinance has curtailed this right. Where no person approaches the NCLT within one year, the shares will now be automatically transferred to the Investor Education & Protection Fund. In addition, non-compliance of Section 90 now carries a year's imprisonment as a discretionary component of the punishment.

  •  

Practical Omissions?

Remuneration of Independent Directors (IDs)

As per Section 149(6)(c) of the Act, an ID's entire remuneration (including sitting fees, expenses and commission) are excluded from the ambit of pecuniary relationships. The Committee observed that the proportion of pecuniary rewards in an ID's overall annual income could compromise his independence and that only sitting fees and expenses incurred should be exempted. The Committee also had recommended that the pecuniary relationship limit of an ID with the company be hiked to 20% of his total annual income with a sub-limit of 10% for professional fees received.

  •  

Recategorization of miscellaneous reporting offences

Please refer to the table below for a list of offences that have been recategorized as civil liability only and are within the purview of the compounding procedure.

Table of miscellaneous reporting offences

SECTION

NEW LIABILITY

CHANGE

Section 53(3) - Prohibition on issue of shares at a discount

The company and every officer in default faces a penalty equal to the amount raised through the issue or INR 5 lakh whichever is less. In addition, company is required to refund all monies with a penal interest of 12%

Imprisonment dropped

Section 92(5) - Failure to file Annual Return within 60 days of AGM

The company and every officer in default faces a penalty of INR 50,000 and INR 100 for each day of continuing failure subject to a cap of INR 5 lakh

Imprisonment dropped

Section 102(5) - Failure to annex statement of 'material facts' to notice of general meeting

Every promoter, director, manager or other key managerial personnel is liable for INR 50,000 or five times the amount of benefit and INR 100 for each day of continuing failure subject to a cap of INR 5 lakh accruing to the aforesaid persons or their relatives whichever is higher.

INR 100 penalty for continuing failure added

Section 105 - Proxies

Officers in default are liable for a fixed penalty of INR 5,000

Classification from 'fine' to penalty'

Section 117 – Not filing shareholders' resolutions with registrar

Fixed penalty of INR 1 lakh subject to a maximum of INR 25 lakh for companies.

Similarly, fixed penalty of INR 50,000 subject to a maximum of INR 5 lakh for officers in default.

INR 500, subject to maximum of IN 5 lakh penalty for continuing failure added for both companies' officers and liquidator, if any.

Section 121(3) – Not filing report on AGM by listed companies

Fixed penalty of INR 1 lakh subject to a maximum of INR 5 lakh for companies.

A penalty of at least INR 25,000 subject to a maximum of INR 1 lakh for each officer in default.

INR 500 penalty for continuing failure added for both companies and officers

Section 137(3) – Not filing financial statement with registrar

The MD and CFO and in their absence the responsible director or in his absence the entire board is liable for INR 1 lakh and INR 100 for each day of continuing failure subject to a cap of INR 5 lakh.

Imprisonment dropped

Section 140 - Failure by auditor to intimate registrar of resignation

A penalty equal to the remuneration of the auditor or INR 50,000 whichever is less and INR 100 for each day of continuing failure subject to a cap of INR 5 lakh.

INR 100 penalty for continuing failure added

Section 157 – Not filing Director Identification Number (DIN) with the registrar

The company and every officer in default faces a penalty of INR 25,000 and INR 100 for each day of continuing failure subject to a cap of INR 1 lakh

INR 100 penalty for continuing failure added

Section 159 – Failure by director to comply with DIN requirements

A penalty of INR 50,000 and INR 500 for each day of continuing failure

Imprisonment dropped

Section 164 – Disqualification for director

Failure to comply with the provisions relating to number of directorships in Section 165

A new ground for disqualification

Section 165 – Number of directorships

A fixed penalty of INR 5,000 for each day of contravention

Classification from 'fine' to penalty'

Section 191 – Payment to directors for loss of office etc.

A fixed penalty on INR 1 lakh for director of a company.

Classification from 'fine' to penalty'. Also, quantum has been enhanced from the range of INR 25,000 to INR 1 lakh to a fixed penalty.

Section 197– Managerial remuneration

A fixed penalty on INR 1 lakh for default for any defaulting persons.

Companies also liable for a fixed penalty of INR 5 lakh

Section 203 – Non compliance of KMP provisions

Fixed penalty of INR 5 lakh for companies.

A penalty of INR 50,000 and INR 1,000 for each day of continuing failure subject to a cap of INR 5 lakh for each officer in default

INR 1,000 penalty for continuing failure added for officers

Section 238 – Failure to register offer to compulsorily acquire shares from dissenters in scheme of arrangement

Directors who issue circular are liable for a fixed penalty on INR 1 lakh

Classification from 'fine' to penalty'. Also, quantum has been enhanced from the range of INR 25,000 to INR 1 lakh

Section 446B – Lesser penalties for One Person Companies or small companies.

Non-compliance pertaining to filing annual returns (Section 92); shareholders' resolutions (Section 117); and financial statements (Section 137) attracts a liability of up to half the penalty in specified sections

Imprisonment dropped

Section 454A– Penalty for repeated default

Where a company or an officer repeats a default within three years of an order imposing a penalty for such default, the penal rate shall be double.

This is a new provision to disincentivise repeat offences.

Comment

Policy mechanisms that seek to increase reporting and disclosure on the one hand and those that seek to improve judicial efficiency or deregulate businesses can run counter to each other.

Hot on the heels of India's leap to 77th position in the World Bank's 'Ease of Doing Business' rankings, the Ordinance is an honest effort at striking the right balance between these competing aims.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions