On 1 February 2023, Hon’ble Finance Minister Nirmala Sitharaman, in her budget speech stated that “[f]or enhancing ease of doing business, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. For furthering the trust-based governance, we have introduced the Jan Vishwas Bill to amend 42 Central Acts. This Budget proposes a series of measures to unleash the potential of our economy.” Furthermore, the Finance Bill seeks to decriminalize various provisions under, inter alia, the Income Tax Act, 1961 and Central Goods and Service Tax Act, 2017. In view of recent trend of decriminalization, it will be worthwhile to revisit amendment to Companies Act, 2013 (“Companies Act”) and analyse the impact of decriminalization of provisions thereto.
The Companies Act, as it originally stood, was premised on the deterrence doctrine wherein failure to comply with provisions of the Companies Act, would entail penal consequences under criminal law. In totality, the Companies Act, originally, consisted of 134 penal provisions, of which only 18 non-compliances fell under the purview of in-house adjudication mechanism and the remaining 116 non-compliances would entail initiation of criminal proceedings.
With the advent of ease of doing business in India, there has been a shift from penalizing regulatory non-compliances to decriminalization of offences under the Companies Act. Decriminalization, in literal sense, means the legislative act or process of legalizing an illegal act. However, in context of the Companies Act, the reforms qua decriminalization are two-fold: first, changing the nature of certain criminal offences into civil wrongs and second, omitting certain other redundant offences altogether.
The process of decriminalization was undertaken to ensure smooth operations of companies as well as to promote setting up of more businesses in India. Furthermore, the same would reduce protracted litigation and improve functioning of judicial and quasi-judicial bodies, exercising jurisdiction under the Companies Act. In view thereof, the Companies (Amendment) Act, 2019 and Companies (Amendment) Act, 2020 (“Amendment Act, 2020”) were passed, decriminalizing the Companies Act in two phases. The Amendment Act, 2020 decriminalized nearly 46 provisions under the Companies Act, after taking into account the issues raised in the Report of Company Law Committee (“CLC”) headed by Mr. Injeti Srinivas.
The CLC in its Report observed that serious violations of law, especially wrongful conduct involving fraudulent elements, should be dealt with under criminal law while minor, technical and procedural non-compliances, may be dealt with through civil jurisdiction instead of criminal. Pertinently, this distinction has been brought about by imposition of penalty instead of fines and/ or imprisonment, wherein Section 454 of the Companies Act provides that penalties shall be adjudicated and imposed by officers appointed by the Central Government, not below the rank of Registrar. Pertinently, the appeal against order adjudicating penalties would also lie before the Regional Director under Section 454(5) of Companies Act and not before civil/ criminal courts. Accordingly, the distinction between penalty and fine is as follows:
|“Whenever the word “penalty” is used in a section, it implies that the default is within the purview of the in-house adjudication mechanism, i.e., the amount of penalty will be adjudicated by the Registrar of Companies.||If the word “fine” is used in a section, it is outside the scope of power of the Registrar of Companies and it means that the adjudication will be done by a court of competent jurisdiction.”|
In the present Article, we seek to analyse the various provisions decriminalized pursuant to the Amendment Act, 2020 and further, endeavour to do an impact analysis in the wake of such decriminalization.
Decriminalisation of Offences
As a result of two-phase decriminalization, the Companies Act now consists of 124 penal provisions, of which 58 non-compliances fall under the purview of in-house adjudication mechanism and the remaining 66 non-compliances would entail initiation of criminal proceedings. Furthermore, the Amendment Act, 2020, in case of certain offences, has eliminated imprisonment and restricted the punishment to fine only and/or reduced the fine and/ or penalty so imposed. Accordingly, the ambit of the Amendment Act, 2020 can be primarily categorized into three categories, viz., (1) imposition of penalty in lieu of fine/ imprisonment; (2) reduction of punishment, primarily, imposition of fine in lieu of imprisonment; and (3) omission of offences, elaborated hereinbelow.
Imposition of Penalty in lieu of Fine/ Imprisonment:
The first tranche of decriminalization pertains to conversion of criminal offences to civil wrongs wherein the penalties will be adjudicated by in-house adjudication mechanism and not by criminal courts. In relation to the same the provisions amended by the Amendment Act, 2020, include:
|Sr No.||Section||Offence||Post-decriminalization Penalty|
|56(6)||Non-compliance of procedure for registration of transfer or transmission of securities.||Penalty of fifty thousand rupees.|
|86(1)||Non-compliance of provisions pertaining to registration of charges provided under Chapter VI.||Penalty of five lakh rupees on company and of fifty thousand rupees on officer in default.|
|88(5)||Failure to maintain register of members or debenture holders or other security holders.||Penalty of three lakh rupees on company and of fifty thousand rupees on officer in default.|
|89(5)||Failure to declare beneficial interest in any share by any person.||Penalty of two hundred rupees for each day till default continues, subject to a maximum of five lakh rupees.|
|89(7)||Failure of company to file the return in relation to declaration of beneficial interest in any share.||Penalty of one thousand rupees for each day till default continues, subject to a maximum of five lakh rupees. Penalty of two lakh rupees on officer in default.|
|90(10)||Failure to declare significant beneficial ownership in a company by any person.||Penalty of fifty thousand rupees and in case of continuing failure, one thousand rupees per day till default continues, subject to a maximum of two lakh rupees.|
|90(11)||Failure of company to maintain register of significant beneficial owners in a company.||Penalty. of one lakh rupees and in case of continuing failure, five hundred rupees per day till default continues, subject to a maximum of five lakh rupees with further penalty on officer in default.|
|92(6)||Certification of annual return by company secretary not in compliance with Section 92 or rules made thereunder.||Penalty of two lakh rupees.|
|105(5)||Invitation to appoint any particular person as proxy or any one of number of persons is issued to a member.||Penalty of fifty thousand rupees.|
|124(7)||Failure to comply with provisions pertaining to unpaid dividend account.||Penalty of one lakh rupees and in case of continuing failure, five hundred rupees per day till default continues, subject to a maximum of ten lakh rupees with further penalty on officer in default.|
|134(8)||Failure to comply with provisions pertaining to approval and filing of financial statement, board’s report and so on.||Penalty of three lakh rupees on the company and of fifty thousand rupees on officer in default.|
|135(7)||Non-compliance of corporate social responsibility policy.||Penalty of twice the amount required to be transferred by the company to the Fund or one crore rupees, whichever is less and further penalty on officer in default.|
|143(15)||Failure of auditor to report any matter pertaining to fraud to the Central Government.||Penalty of five lakh rupees on listed company and of one lakh rupees on other companies.|
|172||Non-compliance of any provisions of Chapter XI, i.e., Appointment and Qualification of Directors, where specific penalty is not provided.||Penalty of fifty thousand rupees and in case of continuing failure, five hundred rupees per day till default continues, subject to a maximum of three lakh rupees with further penalty on officer in default.|
|178(8)||Failure to comply with section 177 and 178 pertaining to audit committee, nomination and remuneration committee and stakeholders relationship committee.||Penalty of five lakh rupees on company and of one lakh rupees on officer in default.|
|184(4)||Failure of director to disclose interest as provided under Section 184(1) and (2).||Penalty of one lakh rupees.|
|187(4)||Failure to comply with requirement of investment of company to be held in its own name.||Penalty of five lakh rupees on company and of fifty thousand rupees on officer in default.|
|188(5)||Non-compliance of provisions in relation to related party transactions.||Penalty of twenty-five lakh rupees in case of listed company and penalty of five lakh rupees in case of any other company.|
|204(4)||Failure to comply with terms of secretarial audit.||Penalty of two lakh rupees.|
|232(8)||Failure to file certified copy of order, pertaining to merger and amalgamation of a company, with the Registrar within thirty days.||Penalty of twenty thousand rupees and in case of continuing failure, one thousand rupees per day till default continues, subject to a maximum of three lakh rupees.|
|247(3)||Non-compliance of Section 247 by valuers undertaking valuation of any property, stocks, shares, debentures and so on of the company.||Penalty of fifty thousand rupees.|
|405(4)||Failure to furnish adequate information as sought by order of Central Government.||Penalty of twenty thousand rupees and in case of continuing failure, one thousand rupees per day till default continues, subject to a maximum of three lakh rupees.|
|450||Non-compliance of any provision of Companies Act and/ or rules thereunder, wherein specific penalty is not provided.||Penalty of ten thousand rupees and in case of continuing failure, one thousand rupees per day till default continues, subject to a maximum of two lakh rupees with further penalty on officer in default.|
Reduction of Punishment, viz., Imposition of Fine in lieu of Imprisonment:
The Amendment Act, 2020 further amended the Companies Act, to reduce the punishment and/ or penalty imposed in case of certain offences. The most significant of such reduction is imposition of fine in lieu of imprisonment. The relevant provisions, in relation to the same include:
|Sr No.||Section||Offence||Post-decriminalization Fine|
|8(11)||Non-compliance of provisions pertaining to formation of companies with charitable objects.||Fine of minimum ten lakh rupees extending to one crore rupees on the company and at least fine of twenty thousand rupees which may extend to twenty-five lakh rupees on officer in default.|
|26(9)||Failure to issue prospectus in compliance with Section 26.||Fine of minimum fifty thousand rupees extending to three lakh rupees on the company and on every person party to issuance of prospectus.|
|40(5)||Failure to apply for permission to deal with securities in stock exchanges, prior to making public offer and other non-compliances of Section 40.||Fine of minimum five lakh rupees extending to fifty lakh rupees on the company and at least fine of fifty thousand rupees which may extend to three lakh rupees on officer in default.|
|68(11)||Non-compliance of provisions pertaining to buy-back of shares as provided under Section 68 read with regulations made by Securities and Exchange Board.||Fine of minimum one lakh rupees extending to three lakh rupees on the company and on officer in default.|
|128(6)||Failure of managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company in complying with provisions pertaining to maintaining books of accounts and other relevant books.||Fine of minimum fifty thousand rupees extending to five lakh rupees.|
|147(1)||Violation of compliances in relation to auditors, as provided under Section 139 to 146.||Fine of minimum twenty-five thousand rupees extending to five lakh rupees on the company and at least fine of ten thousand rupees which may extend to one lakh rupees on officer in default.|
|167(2)||Person continues to function as a director despite being disqualified under Section 167(1).||Fine of minimum one lakh rupees extending to five lakh rupees.|
|242 (8)||Alteration of memorandum or articles of company, in contravention of Section 242(5).||Fine of minimum one lakh rupees extending to twenty-five lakh rupees on the company and at least fine of twenty-five thousand rupees which may extend to one lakh rupees on officer in default.|
|243(2)||Acting as managing director, other director or manager of company in contravention of Section 243(1)(b) and (1-A).||Fine which may extend to five lakh rupees.|
|347(4)||Contravention of rules, if any, in relation to disposal of books and papers of company wound up and about to be dissolved.||Fine which may extend to fifty thousand rupees.|
|392||Non-compliance of provisions of Chapter XXII by a foreign company.||Fine of minimum one lakh rupees extending to three lakh rupees on the company and at least fine of twenty-five thousand rupees which may extend to five lakh rupees on officer in default. In case of continuing offence, additional fine will be levied.|
Apart from the aforesaid, provisions have been amended to reduce the quantum of fine and/ or penalty.
Omission of Offences
The Amendment Act, 2020 lastly has omitted various penal provisions, wherein, the omission may be categorised into three parts: (a) offences rendered redundant as the same may be adjudicated under contempt jurisdiction of Tribunal under Companies Act; (b) offences which can be dealt through other laws; and (c) offences to be dealt with under alternate framework and/ or mechanisms. The provisions so omitted include:
|Sr. No.||Section||Offence||Reason for Omission/ Substitution|
|Offences Rendered Redundant|
|48(5)||Non-compliance of order of Tribunal in relation to variation of shareholder’s rights.||Breach of order of Tribunal may be dealt with under contempt jurisdiction of the Tribunal.|
|59(5)||Non-compliance of order of Tribunal pertaining to rectification of register of members.|
|66(11)||Non-compliance of order of Tribunal in relation to reduction of share capital.|
|71(11)||Non-compliance of order of Tribunal pertaining to redemption of debentures.|
|Offences Which Can Be Dealt Through Other Laws|
|342(6)||Prosecution of delinquent officers and members of company.||Instead of imposing criminal penalty, the non-compliance may be dealt with by mandating cooperation.|
|Offences To Be Dealt With Under Alternate Framework / Mechanisms|
|16(3)||Failure to comply with direction of Central Government to rectify the name of company.||The non-compliance of this provision may be dealt with by auto-generating a neutral name.|
|441(5)||Non-compliance of order of Tribunal or Regional Director in relation to compounding of offences.||In place of imposing separate penalty, maximum fine for initial offence, shall be doubled.|
|284(2)||Non-cooperation with the company liquidator.||Instead of affixing criminality to non-cooperation, direction of cooperation may be passed by Tribunal.|
|302(4)||Failure to file order of Tribunal declaring dissolution of company with the Registrar.||It was considered that the copy of order may be forwarded to Registrar by Tribunal, in lieu of affixing criminality to non-compliance.|
|356(2)||Failure to file order of Tribunal declaring dissolution of company as void with the Registrar.|
Decriminalization of offences has reduced the burden on courts, by virtue of increase in prosecutions being handled by in-house adjudication mechanism and omission of offences. As per data collected from the Registrars of Companies, more than 1,000 company law default cases have already been disposed of by the Adjudicating Officers (Registrars of Companies) during the financial years, 2018-19, 2019-20 and 2020-21, in a summary manner. Furthermore, omission of redundant offences would ensure that there is no multiplicity of proceedings vis-à-vis the contempt proceedings.
Moreover, decriminalization has encouraged establishment of more businesses in India whereby more than 1,55,000 companies were registered in India in the financial year 2020-21 which is almost 3 times more than the average number of companies registered annually, six years ago. The shift from deterrence to trust based economy, will continue to encourage investment and setting up of more businesses in India.
Decriminalization would further foster improved corporate compliance by virtue of emphasizing on cooperation rather than criminality. The only test is whether imposition of penalties would act as sufficient deterrence for corporations to comply with provisions of the Companies Act or the same would render the Companies Act toothless.
In conclusion, the Amendment Act, 2020 seeks to amend the Companies Act, to decriminalize various offences by (a) increasing the jurisdiction and remit of in-house adjudication mechanism and thereby decreasing burden on the courts; (b) reduction of punishment, wherein removal of imprisonment as punishment, would enable the shift to trust based economy; and (c) omission of offences, which can be dealt under other laws or alternate mechanisms or have been rendered redundant, which would ensure that there is no duplicity of proceedings and/ or initiation of inconsequential proceedings.
The two-phase decriminalization of Companies Act was undertaken, primarily, with a view to encourage ease of doing business in India and to reduce the burden on courts and tribunals. Not only has decriminalization of offences under Companies Act aided in boosting the economy, the same was also necessary to ensure that mere technical non-compliances do not entail criminal prosecution. The criminal justice system in India is overburdened whereby taking technical and/ or procedural non-compliances out of purview of criminal courts would aid in reducing the existing backlog and empower Central authorities, viz., Registrar and Regional Directors.
In a short span of two years, it is seen that decriminalization has fast-tracked disposal of company law defaults. It is in view of this success of decriminalization of offences under the Companies Act, that 42 Acts are sought to be amended wherein 3,400 provisions would be decriminalized. It is pertinent that decriminalization is not equated with deregulation and the extent of decriminalization is such that it instils faith of investors and businesses in Indian economy.
–Archana Balasubramanian, Partner and Prapti Kedia, Senior Associate
 Government of India, February 2023, Speech of Nirmala Sitharaman, Minister of Finance, available at <chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.indiabudget.gov.in/doc/budget_speech.pdf>, last accessed on 1 May 2023.
 Black’s Law Dictionary 473 (9th ed. 2009).
 Boost to Ease of Doing Business and Investment in the country – Decriminalization of offences under the Companies Act, 2013, Ministry of Information and Broadcasting, Government of India, available at https://transformingindia.mygov.in/wp-content/uploads/2021/09/Ease-of-doing-business-eng.pdf, last accessed on 23 April 2023.
 Mr. Ankoosh Mehta et all, Companies (Amendment) Act, 2020 – A Refreshing Change, 2021 SCC OnLine Blog Exp 52, available at https://www.scconline.com/blog/post/2021/07/01/companies-amendment-act-2020-a-refreshing-change/, last accessed on 23 April 2023.
 Ministry of Corporate Affairs, November 2019, Report of the Company Law Committee, p. 15, available at https://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf, last accessed on 23 April 2023.
 Sharanya Ramakrishnan, 2021, Decriminalisation of offences under Companies Act, available at https://blog.ipleaders.in/decriminalisation-of-offences-under-companies-act/, last accessed on 23 April 2023.
 Supra note 5, p. 26 to 31.
 Supra note 3.
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