Government Relaxes Companies Act, Eases Business Process

The government has decriminalized 48 sections by eliminating or reducing penal provisions and omitting imprisonment for various offenses that were considered procedural and technical in nature. This initiative would aid in easing the process of business.

The bill was passed on Saturday in the Lok Sabha. It has come at a time when companies are reeling under stress due to the COVID-19 pandemic. The Finance and Corporate Affairs Minister Nirmala Sitharaman has announced decriminalization of various provisions under the companies law would also assist small companies by reducing the litigation burden on them.

However, the companies bill has proposed to remove the imprisonment for nine offenses that relate to non-compliance with orders of the national company law tribunal (NCLT). Furthermore, these include matters pertaining to the winding-up of companies, the default in the publication of NCLT order relating to the reduction of share capital, the rectification of register of security holders, a variation of rights of shareholders, and payment of interest and redemption of debentures.

Moreover, if a company fails to transfer the amount to a specified fund, it could be liable to a penalty twice the amount required to be transferred or one crore whichever is considerably less. Additionally, every officer of the organization would have to pay a penalty of one-tenth of the amount required to be transferred by the organization, instead of the earlier provision of three years imprisonment and a maximum fine of five lakh.

Pavan Kumar Vijay, Founder, Corporate Professionals says, “These amendments are in furtherance of the objective of CAB 2020 to eliminate subjectivity in the adjudication process, which exists in such cases because the Act provides the adjudicating officer with the power to order either punishment of imprisonment or impose a criminal fine or both.”

Further, the Bill has removed the punishment of imprisonment prescribed under Sections 26(9) and 40(5) of the Act. These sections relate to the provision of a public offering of securities by a company like matters to be stated in the prospectus.

The Bill also states that the government has also rationalized numerous penalties under the Act such as for delay in filing the financial statement with the registrar of companies. Also, The corporate affairs ministry has decriminalized sections where the complainant can enter into a compromise, and agree to have the charges canceled against the accused.

Such offenses could be, for instance, default concerning section 8 (11), which deals with the formation of companies with charitable objects, section 26 (9) regarding matters to be stated in the prospectus. The punishment in these cases includes a fine as well as provision for imprisonment for the company’s directors or other individuals involved.

The new penal provision states that, if any person fails to make a declaration of significant beneficial ownership, the minimum penalty has been reduced by half to Rs.50,000 and in case of continuing failure it could be Rs. 1,000 each day up to a maximum level of Rs. 200,000.