Transfin.
HomeNewsGuidesReadsPodcastsVideosTech
  1. Guides
  2. Advice

What are the Changes Proposed to Decriminalise Companies Act, 2013? Why is it as Important as Decriminalising Income Tax Act, 1961?

Editor, TRANSFIN.
May 9, 2020 10:28 AM 5 min read
Editorial

In the same way that Government passed the Vivad se Vishwas Scheme under the Income Tax Act, 1961 for tax decriminalisation of individual citizens, important strides have been made towards decriminalisation of Companies Act, 2013.

 

On March 4th, the Union Cabinet cleared 72 amendments to the Act amidst a prolonged economic slowdown to boost ease of doing business and to moderate the penalty regime. The changes were based on recommendations of a high-level panel set up in September 2019 i.e.  the Company Law Committee under Injeti Srinivas, Secretary, Corporate Affairs Ministry, who submitted a report in November 2019.

 

On March 17th, the new set of amendments were introduced in the Lok Sabha by Minister for Corporate Affairs Nirmala Sitharaman, where they await passage to become an Act. As of April 29th, it had emerged that the Government was considering taking an ordinance route to fast-track the amendments.

 

Let us try to understand why such changes are deemed necessary for a conducive regulatory environment for businesses in India.

 

 

What Are the Changes Proposed to the Companies Act, 2013?

 

In the Companies (Amendment) Bill, 2020, 23 offences out of 66 compoundable offences under the Act were re-categorised. Compoundable offenses are those offences where a complainant can agree to take back charges levied against the accused i.e. where compromise is an option.

 

Seven compoundable offences were entirely omitted, the penalty for 11 was downgraded from imprisonment to a fine, andfive offences were recommended to be dealt with an alternative framework.

 

What are the Changes Proposed to Decriminalise Companies Act, 2013? Why is it as Important as Decriminalising Income Tax Act, 1961?
In the same way that Government passed the Vivad se Vishwas Scheme under the Income Tax Act, 1961 for tax decriminalisation of individual citizens, important strides have been made towards decriminalisation of Companies Act, 2013.

 

The amendments seek to decriminalise certain offences where transgressions can be determined objectively without malafide intent, and where there is lack any element of fraud or which do not have a larger public interest.

Penalty Reductions

The amount of fines levied has been decreased for many offences. For example:

  • Failure to file annual return with the Registrar of Companies – maximum fine is proposed to be reduced from ₹5L ($6,609) to ₹2L ($2,643).
  • Notice to be given to Registrar for alteration of share capital – fine for failure to comply would lead to penalty of ₹500 ($6.6) per day during which such default continues instead of ₹1,000 ($13.2) per day, which is the rule at present.
  • Merger and amalgamation of companies – If these happen without adhering to Section 232 provisions, fines can currently extend to ₹25L ($33,182). Amendment seeks to change this to a maximum of ₹3L ($3,981).
  • Rectification of company name in violation of Section 16 guidelines (trademark or copyright violation). Fine up to ₹1L ($1,327) removed. Company would be able to change its name within three months or the Central Government (CG) would allot it a new name, which it won’t be allowed to change.

 

Imprisonment Reductions:

The spectre of imprisonment has been eliminated for certain offences, mainly related to failure to comply with some Sections of the Act such as:

  • Power of company to purchase its own securities – violation of Section 68 provisions of Act.
  • If a company prospectus is issued in contravention of the provisions of Section 26 of the Act.
  • Books of Account etc. to be kept by a company – not adhering to Section 128 - Financial Statement, Board’s Report etc. – not adhering to Section 134 of the Act.
  • Disposal of books and papers by company (Section 347).
  • Violation of norms as laid out in Formation of companies with charitable objects (Section 8), if applicable.

 

Omitted Offences

Some penalties have been removed entirely. For example:

  • The penalties that apply for any change in the rights of a class of shareholders made in violation of the Act (Section 48). They used to come with penalties up to ₹5L ($6,609).
  • Rectification of register of members (Section 59). Previously, transgressions could be fined up to ₹5L ($6,609).
  • Reduction of share capital by company subject to confirmation by Tribunal under Section 66. Violation currently carries a fine that can extend to ₹25L ($33,182).

 

Corporate Social Responsibility (CSR)

CSR was made mandatory by the Companies Act, 2013 – India was the first country to take such a step. Amendments passed last year made contravening these provisions a criminal offence.

As per the changes proposed in the Companies (Amendment) Bill, 2020, companies that have an obligation to spend ₹50L ($66,000) per annum or less on CSR are no longer required to have a CSR committee. Companies that spend more than the mandatory 2% on CSR in a particular year can carry it forward as credit for fulfilment of CSR obligations for the next few years as well. (The aspect of criminality was removed last August itself when the Government backtracked its proposal.)

 

One-Person Companies

“One-person companies” (those with only one member) and small companies (with low share capital and turnover thresholds) are liable to pay only up to 50% of the penalty for certain offences like failing to file an annual return.

 

Other Amendments

Amendments have also been proposed in other areas, like to enable the listing of Indian companies on stock exchanges in foreign jurisdictions and to reduce the time period for providing offer letter to the existing shareholders under rights issue from the present 15-30 days.

 

Why is Decriminalisation of Companies Act, 2013 Important?

 

As per a statement released by the Government, the proposed changes in the Companies (Amendment) Bill, 2020 are “expected to significantly enhance the confidence of Indian corporates in the Government’s resolve to provide greater ease [of doing business] and accord highest respect to honest wealth creators in the country and reduce the burden on the justice system.”

 

In the words of Nirmala Sitharaman, the amendments made the Companies Act, 2013 “more humane”.

 

What are the Changes Proposed to Decriminalise Companies Act, 2013? Why is it as Important as Decriminalising Income Tax Act, 1961?
The amendments to the Companies Act, 2013 are deemed necessary for a conducive regulatory environment for businesses in India.

 

The focus of the amendments passed by the Union Cabinet this year is to remove the aspect of criminality, dilute penalties from jail sentences to fines, and to allow rectification of defaults through alternative methods. Amending criminal offenses to make them civil offenses is a significant change, since the former can lead to imprisonment in the event of conviction while the latter only attracts a penalty. As of now, there are nearly 60 instances where imprisonment has been threatened in the Companies Act, 2013.

 

Decriminalisation of corporate transgressions can be a step in the right direction for the Indian economy in that it can boost investor sentiment, attract foreign direct investment (FDI) and encourage homegrown businesses to grow their roots in India itself instead of targeting foreign jurisdictions. All in all, such amendments are aimed at making India’s business regulatory landscape appear less uncertain and punitive.

 

You can read the Companies (Amendment) Bill, 2020 in its entirety here.

FIN.

Congratulations! You've made it to the end. Looking for more takes on Business, Finance, Markets, and Investing? Subscribe to our Wrap Up Newsletter for informative and insightful daily news updates, smartly curated from the top sources, delivered straight to your inbox.