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PENALTIES - Proposed Amendments in the Companies Act 2013

News and Press Release - Dated:- 2-2-2016 - 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 .....

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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 .....

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ments 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 .....

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tal, 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 fa .....

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th 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 offi .....

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y 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 13 .....

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nder 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 .....

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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 p .....

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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 o .....

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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 .....

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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 c .....

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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 .....

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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 d .....

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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 fin .....

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hed, 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 b .....

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able 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 .....

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avention 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 pena .....

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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 th .....

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thority 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 mi .....

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ct 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 sh .....

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s 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 .....

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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 .....

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; 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 punish .....

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