PENALTIES - Proposed Amendments in the Companies Act, 2013

28.1 The Act aims to provide for a regime of offences and penalties which is commensurate to the gravity of the offence. During the public consultation, concerns were raised in respect of the punishments for certain sections under the Act being disproportionate, and thus, the Committee has attempted to resolve the anomalies by following principles of law, analysing international best practices and by also taking guidance from the previous committees on this aspect.

28.2 The Committee noted that J.J. Irani Committee Report had recommended that “the Companies Act may lay down the maximum as well as minimum quantum of penalty for a particular offence, however the Act should also provide that while levying a particular quantum of penalty, the levying authority should also take into consideration the size of company, nature of business, injury to public interest, nature and gravity of default, repetition of default, etc.”. The Standing Committee on the Companies Bill, 2009 in its twenty first report had also stated that “transgressions, purely procedural or technical in nature, should be viewed in a broader perspective, while serious non-compliance or violations including fraudulent conduct should invite stringent /deterrent provisions like imprisonment”. There is a varied experience internationally, where a separate and a more liberal penalty and compliance regime has been laid down for companies which are small in size in terms of their business though a differentiated treatment with a higher liability for statutory annual filings is also seen in some jurisdictions, for example UK, presumably to ensure a high rate of compliance.

28.3 The Committee observed that small businesses need to be encouraged by laying down a more liberal regime and wherever disproportionate punishments are proposed these need to be reduced. Further, the Committee felt that the procedural and technical non-compliances should attract less stringent punishments as compared with violations for substantive requirements. The Committee noted that the Act provides a duration of up to 300 days for companies to comply without the fear of prosecution in as many as six major compliance requirements. The Committee has given its recommendations on the suggestions received keeping these principles in mind but also keeping in mind the requirement for improving the low compliance levels, especially amongst private companies.

28.4 The Committee further observed that the extension of the liberal regime to private companies with no significant public interest would be ideal. However, it is difficult to define public interest for this purpose in a holistic manner and limiting it to private companies having debt above a threshold may leave out a large number of companies. Also the Act provides for various other requirements (like appointment of IDs, vigil mechanism, auditor rotation etc.) which are applicable to companies depending upon their paid-up capital, turnover, debts etc. Recognition of the concept of public interest entity may require review of such thresholds/requirements and it may, therefore not be appropriate to provide a specific definition for public interest entities. However, in case of penal provisions which provide discretion to courts on imposing fines/imprisonment (e.g. in cases where the penal provisions provide for fine or imprisonment up to certain amount/term) the Courts/Tribunal could be empowered to consider certain factors before determining the fine/imprisonment. These factors could be size of the company, nature of business, injury to public interest, nature/gravity of default and repetition of default. Such a general provision could be inserted in the Act in the Miscellaneous Chapter.

Annual Returns (Section 92) and Financial Statements (Section 137)

28.5 Section 92 of the Act prescribes that a company is to file a copy of its annual return within sixty days from the date of the annual general meeting, with the Registrar. Sub-section (5) prescribes the punishment for not filing the annual returns within the period prescribed under Section 403 (i.e. three hundred thirty days from the date of the annual general meeting). The punishment prescribed is fine of not less than Rupees Fifty Thousand but which may extend to Rupees Five Lakh for the company, and imprisonment for a term which may extend to six months or fine not less than Rupees Fifty Thousand and up to Rupees Five Lakh or both for the officer in default. Similarly, under Section 137 of the Act, for non-filing of financial statements, the punishment prescribed is fine of Rupees One Thousand per day for the period during which the failure continues, but which shall not exceed Rupees Ten Lakh for the company, and imprisonment for a term which may extend to six months or fine not less than Rupees One Lakh but which may extend to Rupees Five Lakh or both for the officer in default.

28.6 As the two statutory annual filings for a company are of critical importance to the Registry and all stakeholders, and as prosecution is possible only after a period of 330/300 days, the imprisonment or fine prescribed has to be seen in this context. Further, an upper limit on imprisonment term provides the required flexibility to a Court to weigh the punishment against the size of the company, etc. Hence no reduction in quantum of punishment is proposed. However, the fines under sub-section (5) of Section 92 and sub-section (3) of Section 137 have been viewed as excessive for one person companies and small companies. The Committee recommends that such class of companies should be subject to a fine, which is half of what is applicable under the provisions of Section 92(5) and Section 137(3).

Adjudication of penalties

28.7 Section 454 of the Act provides for an in-house framework for prompt administration of penalties on detection of an offence by Registrar of Companies. The Committee while examining suggestions to reduce penalties under the mechanism noted that there are twenty sections in the Act, which are subject to the adjudication mechanism prescribed under Section 454. The said sections have a maximum penalty of rupees one lakh, and in most cases, the penalty is a fixed amount linked to number of days of default (for example, rupees one thousand per day of non-compliance) etc., thus not providing much discretion to the adjudicating officers. In the case of section 42, the penalty provided is very high and it is being dealt with separately. Further, in most of the cases, the sections deal with rights of shareholders like maintenance of registered office, maintenance of register of members, etc. In view of this, the Committee felt that it would not be prudent to reduce the prescribed penalties for the adjudicating authority, who is not given any discretion on the quantum of penalty to ROC. Further, the Committee also felt the role of appellate body under section 454 would need to be clearly brought out as the appellate body may not be able to levy a lesser penalty than that was levied by adjudicating authority (i.e. ROC).

Fee for filing (Section 403)

28.8 Section 403 of the Act permits the submission, filing, registration or recording of any document required to be submitted, filed, registered or recorded under the Act within a period of two hundred and seventy days from the date on which it should have been submitted on payment of prescribed additional fees. After the expiry of the abovementioned period, the second proviso of sub-section (1) permits the filing of such documents on payment of further additional fees, which has been prescribed in the Table of Fees pursuant to Rule 12 of the Companies (Registration of Offices and Fees) Rules, 2014. The Committee recommended that a clarification be issued under Note 3 of Table B, that on a combined reading of the second proviso of sub-section (1) of Section 403 along with Table B, documents are permitted to be submitted, filed, registered or recorded under the provisions of the Act even after a delay of two hundred and seventy days from the date on which it should have been filed, on a payment of additional fee as prescribed. Paragraph 22.2 of Part I of report may also be referred to.

28.9 The Committee is of the view that a more liberal regime for fees/ additional fees be laid down for one person companies and small companies, it is recommended that the fees prescribed in Table A pursuant to Rule 12 of the Companies (Registration of Offices and Fees) Rules, 2014 should be halved for such companies.

28.10 At the same time, the Committee noted with concern the dip in annual statutory filings as compared to last year, indicating laxity owing to the additional time and the low filing fees, which need to be addressed. As the hands of the Registrar are tied with regard to filing of prosecution before the prescribed 270 days during which filing can be done with additional fees in case of the six identified filings where section 403 is applicable, the Committee felt that fees for timely filing may be reduced to zero, additional fees may be increased to up to 10 times of the current additional fees with steep slabs after the first slab. Repeated non-compliance should result in deprival of the moratorium from prosecution as specified under Section 403 and attract higher level of additional fees.

Audit Committee and Nomination & Remuneration Committee and Stakeholders Relationship Committee (Section 177 and 178)

28.11 Section 177 of the Act lays down the constitution and functions of the Audit Committee and Section 178 lays down the constitution and functions of the Nomination & Remuneration Committee and Stakeholders Relationship Committee. Sub-section (8) of Section 178 of the Act states that for any contravention of the provisions of Section 177 or 178, the company shall be punishable with fine not less than rupees one lakh but which may extend to Rupees Five Lakh, and every officer in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than rupees twenty five thousand but which may extend to rupees one lakh, or with both. The Committee observed that provisions of section 177 and 178 are applicable to listed and bigger public companies and most of the requirements under these sections are of substantive nature. Section 292A of the Companies Act, 1956 which provided for the requirements on Audit Committee provided that in case of contravention of such section the officer in default shall be punishable with imprisonment which could extend up to one year or with fine up to Rupees fifty thousand or both. The committee feels that punishment for officer in default under section 178(8) may be aligned with the punishment provided under section 292A (11) of the Companies Act, 1956.

Disclosure of interest by director (Section 184)

28.12 Section 184 of the Act requires two kinds of disclosures from the director – (i) under sub-section (1), his concern or interest in any company or companies or bodies corporates or firms or other association of individuals which shall include the shareholding, at the first board meeting in which he participates as a director post his appointment and thereafter at the first meeting of the board in every financial year or whenever there is a change, in the first board meeting held after such change; and (ii) under sub-section (2), his concern or interest in a contract or arrangement or proposed contract or arrangement. Any contravention of either of the sub-sections results in the imposition of punishment under sub-section (4) i.e. imprisonment for a term which may extend to one year or with fine which shall not be less than Rupees Fifty thousand but which may extent to Rupees One Lakh or with both, on the director. The public comments suggested that the punishment for non-disclosure of every infraction of sub-section (1), even if insignificant, results in the imposition of a minimum fine of Rupees Fifty Thousand extendable to Rupees One Lakh or imprisonment up to a year or both, which is disproportionate and onerous. The Committee observed that it is essential for a director to disclose every concern or interest as required under sub-section (1), or any change thereto, so that the company is aware of such concerns or interests of the director. However, the Committee felt that the minimum fine of Rupees Fifty Thousand was on the higher side, and thus recommended deletion of the provision for minimum fine.

Conditions to be fulfilled for the appointment of certain directors (Schedule V)

28.13 Part I of Schedule V of the Act lays down the conditions to be fulfilled for the appointment of a managing or whole time director or a manager, one of them being that he should not have been sentenced to imprisonment for any period or to a fine exceeding rupees one thousand, for the conviction of an offence under sixteen acts, one of them being the Act. The Committee observed that the threshold of the fine needs revision, as the penalties throughout the Act have undergone upward revision. It was decided to recommend for revision of the disqualifying fine in Part I of Schedule V to Rupees Fifty Thousand in respect of conviction of offences under the Act.

Punishment for fraud (Section 447)

28.14 Section 447 of the Act lays down the punishment for any person found guilty of fraud to imprisonment not less than six months but which may extend to ten years and fine not less than the amount involved in fraud but which may extend to three time the amount involved. Further, in case the fraud involves public interest, the minimum imprisonment shall be not less than three years.

28.15 The Committee received suggestions that the ambit of Section 447 was too broad and would result in minor infractions being punished with severe penalties, which are non-compoundable. However, it was also suggested during the discussions that once the offence of fraud is established, it would not be tenable to provide for a threshold for it to be punishable under Section 447. The Committee observed that the provision has a potential of being misused and may also have a negative impact on attracting professionals in the post of directors etc. and, therefore, recommends that only frauds, which involve at least an amount of rupees ten lakh or one percent of the turnover of the company, whichever is lower, may be punishable under Section 447 (and non-compoundable). Frauds below the limits, which do not involve public interest, may be given a differential treatment and compoundable since the cost of prosecution may exceed the quantum involved.

Compounding of certain offences (Section 441)

28.16 As per Section 441 of the Act, any offence punishable under the Act with fine only is compoundable by the Tribunal. Other offences punishable with imprisonment or fine or both are compoundable only by the special court. Previously, in the Companies Act, 1956, offences punishable with fine as well as offences punishable with imprisonment or fine or both were compoundable by the Tribunal. The compounding provision was inserted by the Companies Amendment Act, 1988 on the recommendation of the Sachar Committee, as it was felt that leniency is required in the administration of the provisions of the Act particularly penal provisions because a large number of defaults are of technical nature and arise out of ignorance on account of bewildering complexity of the provisions. The Committee observed that as per the scheme of the Act, most of the offences which are punishable with fine or imprisonment or both are technical / procedural in nature, and thus, for the leniency and ease in administration of the Act, the old provisions relating to compounding may be re-instated. Therefore, under sub-section (1), the Tribunal should have the power to compound offences punishable with fine as well as offences punishable with imprisonment or fine or both.

Punishment for contravention by auditors (Section 147)

28.17 Under sub-section (2) of Section 147 of the Act, if an auditor of a company contravenes any of the provisions of the specified sections therein, he shall be punishable with fine not less than rupees twenty-five thousand but which may extend to rupees five lakh. However, as per the proviso, if the contravention by the auditor is done knowingly or wilfully with an intention to deceive the company or its shareholders or creditors or tax authorities, the penalty is significantly enhanced to imprisonment for a term which may extend to one year and with fine not less than rupees one lakh but which may extend to rupees twenty-five lakh. Additionally, under sub-section (3), where an auditor has been convicted under sub-section (2), the auditor shall be liable to refund the remuneration received by him and pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in the audit report.

28.18 The Committee observed that the punishment under sub-section (3) is linked to conviction under sub-section (2). Therefore, to align the scope of both the sub-sections, the term ‘any other persons’ in sub-section (3) be replaced with the phrase ‘shareholder or creditor’. Further, the minimum fine under sub-section (2) of Section 147 is harsh, and should be rationalised and the maximum fine should be a multiple of the audit fees. The Committee recommends that under sub-section (2), minimum fine as specified may be retained and maximum fine may extend to rupees five lakh or four times the audit fees, whichever is less, and under the proviso to sub-section (2), the minimum fine should be rupees fifty thousand and which may extend to rupees twenty-five lakh or eight times the audit fees, whichever is less.

National Financial Reporting Authority (Section 132)

28.19 Section 132 of the Act provides for the setting up of a National Financial Reporting Authority for matters relating to accounting and auditing standards. As per sub-section 4(c)(A), where professional or other misconduct is proved on the part of the auditor, the NFRA shall have the power to make an order for imposing penalty, in case of individuals, not less than rupees one lakh but which may extend to five times of the fees received; and in case of firms, not less than rupees ten lakh but which may extend to ten times of the fees received. The Committee is of the view that the minimum fine on the firm may be rationalised to rupees five lakh.

Removal, Resignation of Auditor

28.20 Section 140(3) prescribes a minimum fine of Rupees fifty thousand in case the auditor does not file the statement with regard to his resignation. This fine was considered as onerous for auditors of small companies. The Committee recommended that the minimum fine may be reduced to Rupees fifty thousand or the audit fees, whichever is lesser.

Punishment under Section 172

28.21 Section 172 of the Act is a residuary penalty section where under if a company contravenes any of the provisions of Chapter II (relating to appointment and qualification of directors), the company and every officer of the company who is in default shall be punishable with fine not less than rupees fifty thousand but which may extend to rupees five lakh. It was suggested during the public consultation, that since the appointment of directors in government companies is made by the relevant ministry, such companies should be subject to lesser penalty. The Committee did not agree with the suggestion, and observed that adequate internal procedures exist within the Government for addressing the concerns raised and for prosecution of government companies in such cases.

Offer or invitation for subscription of securities on private placement (Section 42)

28.22 As per sub-section (10) of Section 42 of the Act, if a company makes an offer or accepts monies in contravention of this section, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or rupees two crore, whichever is higher. Additionally, the company is required to refund all monies to subscribers within a period of thirty days of the order imposing the penalty. The Committee deliberated that in situations where the offer size is lesser than Rupees Two Crore, the minimum penalty of Rupees Two Crore may be unreasonable. Further, the Committee noted that the contraventions under Section 42 could either be procedural or substantive, and the punishments for the two need to be differentiated. The Committee remarked that a comprehensive relook of Section 42 has been undertaken, and subject to changes recommended therein, the following recommendations are made –

• Contravention of sub-section (7) and (9) of Section 42 is a procedural violation, hence it shall be subject to a penalty (adjudicated under Section 454) of rupees one thousand per day of default, not exceeding rupees twenty lakh, commencing from the expiry of the time period within which the filings have to be made under the said sub-sections. It was felt that Section 403 should not be applicable to such contraventions;
• Other contraventions under Section 42 shall result in the company, its promoters and directors being punishable with penalty which may extend to the amount involved in the offer or invitation, or Rupees Two Crore, whichever is lower. Refund of all monies, as prescribed, may continue in both the sub-sections.

Resolutions and agreements to be filed (Section 117)

28.23 As per sub-section (2) of Section 117 of the Act, if a company fails to file any resolution which is required to be filed as per the said section before the expiry of the period specified under section 403 i.e. within two hundred and seventy days from the date by which it should have been submitted, the company shall be punishable with a fine not less than rupees five lakh but which may extend to rupees twenty five lakh; and every officer in default shall be punishable with fine not less than rupees one lakh but which may extend to rupees five lakh. The Committee viewed the non-filing of resolutions as a procedural default and the current penalty being on the higher side. Thus, the Committee recommends that the minimum fine for both company and officer in default be reduced to rupees one Lakh and rupees fifty thousand respectively, and a proviso be inserted in sub-section (2) of Section 117, wherein the punishment prescribed for one person companies and small companies may be halved to that under sub-section (2).

Condonation of delay (Section 460)

28.24 Section 460 of the Act provides for condonation of delay by the central government, however the circumstances in which delay may be condoned has not been spelled out clearly in the Act or the rules. The public comments suggested that the MCA should lay down clear guidelines enumerating the circumstances in which delay may be condoned under Section 460 of the Act. The Committee noted that appropriate guidelines may be put in place.

Loan to Directors (Section 185) and Loan and investment by company (Section 186)

28.25 As per Section 185 of the Act, no company shall advance any loan to any of its directors etc., except in a few cases as provided therein. Sub-section (2) provides that any loan advanced in contravention of Section 185 shall result in the company being punishable with fine which shall not be less than rupees five lakh but which may extend to rupees twenty-five lakh, and the director etc. shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than rupees five lakh but which may extend to rupees twenty-five lakh or both. As per Section 186 lays down the manner and conditions in respect of loans and investments by a company. Sub-section (13) states that a contravention of Section 186 shall result in the company being punishable with fine which shall not be less than rupees twenty-five thousand but which may extend to rupees five lakh, and the officer in default shall be punishable with imprisonment which may extend to two years or with fine which shall not be less than rupees twenty-five thousand but which may extend to rupees one lakh or both.

28.26 The public comments suggested that the punishment under Section 185 and 186 was very high as compared to Companies Act, 1956 and should be reduced. The Committee did not accept the recommendation as the enhancement of punishment was undertaken to address the large number of violations of the said section as well as the need to deter diversion of funds by companies.