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Companies Act overhaul: Panel pitches for decriminalisation of several offences to cut legal wrangle

Rahul Shrivastava     August 27, 2018

A panel set up by the Ministry of Corporate Affairs has recommended virtual "decriminalisation" of several offences under the Companies Act to reduce the legal and court battles companies have to face even if the offence committed is not serious but merely a lapse that is essentially technical or procedural in nature. The panel proposed that such "non serious offences" may be shifted to in-house adjudication process.

Set up by Piyush Goyal when he was the interim finance minister, the panel today submitted a report on the review of penal provisions of Company Act 2013 to Arun Jaitley. The report recommends restructuring of corporate offences to relieve Special Courts from adjudicating routine offences and de-clogging the NCLT among several other proposals related to corporate compliance.

The 10-member committee, which includes Kotak Bank's Uday Kotak and lawyer Shardul S Shroff, was set up with a view to promote better corporate compliance.

The committee undertook a detailed analysis of all penal provisions, and broke them down to eight categories based on the nature of offences. After speaking to different stakeholders it recommended that the existing "stringent" law should not be diluted for serious offences covering six categories.

A corporate ministry source said, "the committee has decided to ensure stringent compliance and punitive action in cases of fraud. For example, the cross-cutting liability under section 447, which deals with corporate fraud, would continue to apply wherever fraud is found. But with a view to reduce the burden on businesses the panel has proposed that lapses which are found not willful acts of commission and omission, falling under two categories may be shifted to in-house adjudication process."

The panel in its report says that the change would promote ease of doing business and better corporate compliance. The panel lays down that special courts currently have a huge backlog of prosecution cases and this has been leading to immense hardships for small companies while they were guilty of "lapses".

The ministry will now study the report to work out a formula for de-clogging the National Company Law Tribunal (NCLT) through significant reduction in compounding cases before the tribunal.

The other significant aspect of the report pertains to corporate governance including declaration of commencement of business, maintenance of a registered office, protection of depositors' interests, registration and management of charges, declaration of significant beneficial ownership, and independence of independent directors.

The main recommendations of the committee include restructuring of corporate offences to relieve special courts from adjudicating routine offences, re-categorisation of 16 out of the 81 compoundable offences by shifting them from the jurisdiction of special courts to an in-house e-adjudication framework. In these cases of adjudication defaults would be subject to levy of penalty by the authorised adjudicating officer (Registrar of Companies). Remaining 65 compoundable offences will continue to remain under the jurisdiction of special courts due to their potential misuse.

In another significant move, the report proposes status quo in case of all non-compoundable offences, which relate to serious corporate offences. If accepted the government would have to set up a transparent online platform for e-adjudication and e-publication of orders.

The recommendations related to corporate compliance and corporate governance include re-introduction of declaration of commencement of business provision to better tackle the menace of 'shell companies' and 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.

In another tightening of rules, the panel has proposed non-maintenance of registered office to trigger de-registration process, and disqualification of directors who hold directorships beyond permissible limits. To ensure that independent director don't sacrifice their independence due to pecuniary relationship, a cap on remuneration in terms of percentage of income has been proposed.

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