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COMPANIES (AMENDMENT) ACT, 2020: EASE OF BUSINESS OR BIRTH OF A TOOTHLESS TIGER?
"DECRIMINALISING OF OFFENCES THROUGH COMPANIES (AMENDMENT) ACT, 2020"
This article has been authored by Malika Singh and Shivang Mukherji, final year law students at Symbiosis Law School, Noida
The Companies (Amendment) Bill, 2020 (“Bill”) was passed by the Lok Sabha on 19th September, 2020 and by the Rajya Sabha on 22nd September, 2020. The Bill received the President’s assent on 28th September, 2020 and finally the Companies (Amendment) Act, 2020 (“Amendment Act, 2020”) came into force. The bill will come into force on December 21, 2020.
The Amendment Act, 2020 has now decriminalized more than 45 offences. This decriminalization can be sub-categorized into three heads, which are as follows:
1. Offences where the term of imprisonment has been done away with and the quantum of fines has been reduced considerably. A few notable examples falling in this category are: Section 90(1) of the Companies Act, 2013 (“Act”) wherein, if the company fails to maintain a register of significant beneficial owners, the fine has been considerably reduced from a maximum of Rs. 50 lakhs to a maximum of Rs. 2 lakhs. Similarly, in Section 8(11)of the Act, if there is a failure to comply with requirements provided for in Section 8, the term of punishment has been done away with.
2. The next category of offences that is done away with is the one that is already dealt with by certain other laws. An example of the same is Section 48(5) that deals with variation of rights of shareholders. The provisions for imprisonment and monetary penalty have been omitted via the Amendment Act, 2020.
3. The last category of offences is the one where an alternate mechanism can be adopted to rectify the situation instead of imposing a fine. For example, under Section 16(3) of the Act, the Regional Director has the power to impose punishment for not complying with the order of altering the name of the company. However, under the Amendment Act, 2020 this punishment is now done away with and a new alternate framework has been instituted wherein a failure in complying with the order within a stipulated period would result in an automatic allocation of a new name to the company in question.
The changes brought by the Amendment Act, 2020 can be traced back to Company Law Committee’s (“CLC”) Report dated 14th November, 2019, compiled under the chairmanship of Mr. Injeti Srinivas, wherein more than 45 offences were sought to be decriminalized. The committee gave a logical explanation as to why certain offences under the Act should be decriminalized.
Reasoning of the Company Law Committee
The CLC was of the view that certain offences which were not of a serious nature and were only procedural or technical in nature, must not have heavy penalties or the punishment of imprisonment. However, in cases where the public interest is being hampered, criminal sanctions may be retained. The committee recommended that elements of serious fraud should be dealt with under the criminal laws. If all small technical and procedural offences are brought under the purview of criminal offences, that will only lead to a plethora of cases in the courts and a delay in the prosecution of companies.
On the other hand, there is no element of mens rea involved in a lot of corporate offences. These offences are mostly delays and lapses in complying with some procedural requirements. However, it must be noted that the deterrent for non-compliance is not sought to be removed completely. Imposition of penalty is enough to serve as a push for complying with the technicalities. These small offences are sought to be dealt with by the In-House Adjudication Mechanism (‘IAM Framework’) as enshrined under Section 454 of the Act, wherein the penalties for offences are not to be adjudicated upon by National Company Law Tribunal but are to be adjudicated by officers appointed by the Central Government. They are settled through an online framework as established by the Ministry of Corporate Affairs (“MCA”). Here the Adjudicating Officer decides a certain amount of penalty that is to be charged from the company and its officials. If aggrieved by the order of the adjudicating officer, one can appeal against the same to the Regional Director. This framework was the biggest introduction of the Companies (Amendment) Act, 2019. The entire process is online and rarely requires any physical presence.
Implications of decriminalization on the Indian Economy
Having discussed which offences are sought to be decriminalized and the rationale behind the same, this section of the article shall now discuss its implications on the Indian economy.
Firstly, the corporations in India have received a massive blow to their finances and other investment avenues due to the Novel Coronavirus. The economy is heading towards a slump. In the midst of it, if a company along with its officials is asked to pay fines worth crores of Rupees only because of minor non-compliances, it will further lead to corporate misery and negative sentiment in the market. The government’s move to pass the Bill in the middle of the pandemic shows that they are aiming to promote ease of business.
Secondly, if India strives for the promotion of ease of doing business during the time of the pandemic, it will attract domestic and foreign investment in the country. This will boost the GDP of the company and will further bolster employment opportunities for the ones who became unemployed due to the pandemic and for the ones entering the job market in the current and coming years.
Thirdly, there is a lot of negativity in the market about the fact that directors of the company are charged for serious criminal offences just because of some technical procedural lapse. This leads to unnecessary suits in the courts and there is hardly any compliance from the company’s side after that. The company continues to function without complying with the procedures and the high officials are caught in endless trials proving their innocence. This move of decriminalizing the offences and rationalizing the penalties for some offences will incentivize the companies and their directors to comply with the technicalities at the earliest possible. In fact, the MCA has released a circular dated 02.03.2020 wherein the criminality of Independent Directors and other non - Key Managerial Personnel is talked about and steps have been taken to reduce the same. These amendments are in line with the aforementioned circular.
Fourthly, when the companies are charged with exorbitant fines and its officials are jailed for procedural lapses, it creates a negative outlook in the minds of the general public. It reduces the goodwill of the company in the eyes of the common man. This might further lead to heavy losses for the company. At times when the directors or other Key Managerial Personnel of the companies are publicized widely for facing criminal trials, the stocks of the said companies fall heavily. All of this is unnecessary. If payment of fines can be treated like business expenses and can be settled easily, this will further increase investor confidence, positive outlook for the companies, and will also create ease of doing business.
Lastly, the courts can focus on serious offences. There is already a pile of pending litigation in our country. The Amendment Act, 2020 is a welcome step to rid the courts and tribunals of that burden. The criminal trials of the officers of the company have a tendency to go on for ages because it is very difficult to prove criminality. All of this can now be avoided and courts can focus on those cases where the real public interest is hampered.
Concluding remarks
The pandemic has dealt a severe blow to Companies’ revenue and functioning. Doing away with hefty penalties will surely come to the aid of companies in near future. Additionally, the amendment will ease the burden for start-ups and provide an environment that will facilitate ease of business. However, this looks picture-perfect until a second line of thought emerges from the backdrop that so much leeway to the companies will lead to extreme cases of non-compliance and the companies will now become complacent because the penalties are not very high. Since the directors and other KMPs of the companies are exempted from criminal proceedings, they have greater chances of indulging in fraudulent activities in the garb of minor procedural glitches. While only time will tell whether the Government was correct in decriminalizing as rigorously as it did, till then, it is a move welcomed by all the segments of the society.