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31 August 2020
India's company law regime has evolved over the years and become stricter and more penal in nature. Looking at the relevant sections under the Companies Act 1956 and the Companies Act 2013, which repealed the Companies Act 1956, there has been a paradigm shift in the legislature's viewpoint with regard to the Companies Act's stringency. That said, there has been a recent trend to promote foreign investment in India. Accordingly, the legislature has adopted measures in order to decriminalise – or at least liberalise – India's company law regime. This can be inferred by comparing the Companies Act 1956 and the Companies Act 2013, as numerous provisions have been liberalised.
Despite various attempts to ease doing business in India, the Companies Act 2013 comprises various criminal penalties for minor and technical non-compliance, which are major drawbacks with regard to the ease of doing business as investors are deterred from investing due to such penal provisions. Thus, in order to align the Companies Act 2013 with the objective of attaining ease of doing business in India, the legislature enacted the Companies Amendment Act 2019. Under this amendment, 16 out of 81 of the compoundable offences were converted into defaults of civil nature. However, after the Companies Amendment Act 2019 came into effect, the legislature decriminalised other provisions through the Companies Amendment Bill 2020.
The Companies Amendment Bill 2020 has been approved by the Cabinet and put before the lower house of Parliament (Lok Sabha) for its approval; however, due to the COVID-19 pandemic, Parliament has been adjourned until further notice.
The Companies Amendment Bill 2020 aims to decriminalise offences under the Companies Act 2013 by adopting the following measures.
The Companies Amendment Bill 2020 proposes to omit nine offences dealing with non-compliance which can be heard by the National Company Law Tribunal in regard to:
This measure aims not only to remove such offences which have already been specifically stated in specialised legislation, but also to avoid conflict of jurisdiction. If either multiplicity of law or conflict in jurisdiction arises, confusion will be created which would eventually lead to inordinate delays.
The Companies Amendment Bill 2020 proposes to:
The proposal to remove imprisonment as a form of punishment for such non-compliance will reduce investors' fears and enhance doing business in India.
The Companies Amendment Bill 2020 also proposes that for certain offences (eg, non-compliance with related party transactions) for which imprisonment has been removed, the penalties to be charged will be enhanced. This enhancement aims to ensure that despite omitting imprisonment, the penalty itself will act as a deterrent so as to avoid such offences from taking place.
The Companies Amendment Bill 2020 proposes to reduce the quantum of monetary penalty associated with 22 offences. The bill also proposes to change the nature of the monetary levy in each of these cases from a criminal fine to a civil penalty. The amount imposed as a penalty for non-compliance may be enhanced or reduced. In certain cases, such as where imprisonment has been removed, the penalty has been enhanced so as to still deter violators; however, in certain cases (eg, with regard to the maintenance of records, the failure of certain compliances before the registrar of companies or the failure to comply with annual return filing requirements), the penalty has been reduced.
When deciding the penalty amount under an offence, the Companies Amendment Bill 2020 also takes the type of company into consideration. For instance, if non-compliance occurs within a one-person or start-up company, the penalty may be halved. A maximum limit of Rs200,000 has also been stated for such companies.
This process of altering the penalty amount for such companies will also enhance and promote the establishment of such companies as penalties are being awarded in accordance with their capacities, thus safeguarding their interest.
Certain civil offences that are compoundable in nature (eg, statutory notices not being issued or disclosure obligations not being complied with) will be tried before an in-house adjudication mechanism rather than a court. The in-house adjudicating mechanism will be headed by an adjudicating officer. If aggrieved by the adjudicating officer's decision, the party can appeal before the regional director.
This mechanism will allow parties to obtain justice more efficiently as it provides an alternate mechanism for the resolution of a dispute without approaching a court.
These proposed measures will ensure that disputes are resolved in a more liberal manner compared with the existing measures which impose criminal liability. Further, these measures aim to decriminalise the Companies Act 2013 so as to increase foreign investment and enhance doing business in India.
The basic objective behind the decriminalisation of offences under the Companies Act is to promote ease of doing business in India, which is more important than ever given the negative economic impact of COVID-19. Post-decriminalisation, investors will feel safeguarded against criminal liability for minor non-compliance and eventually this will result in higher foreign investment which will in return boost India's economy.
Due to the decriminalisation of certain provisions, measures such as the removal of criminal offences, the conversion of imprisonment into a civil wrong and the use of the in-house adjudication mechanism have been proposed. These measures will help to reduce prolonged criminal proceedings and clear the case backlog which exist in the judicial system. Such a backlog can deter investors as the possibility of getting stuck in the dispute resolution process is high. These alternate mechanisms will allow investors to resolve disputes more efficiently and quickly, which will act as an incentive as investors would feel confident that if such a situation arises, a quick remedy may be made available to them.
For further information on this topic please contact Neetika Ahuja or Ankita Mehra at Clasis Law by telephone (+91 11 4213 0000) or email (firstname.lastname@example.org or email@example.com). The Clasis Law website can be accessed at www.clasislaw.com.
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