Companies Amendment Bill, 2020: Decriminalising Companies Act

By Madhu Sudan Kankani

The Companies Amendment Bill, 2020, proposes to amend many sections, leading to decriminalisation of several non-compliance and defaults. There are provisions for imprisonment for defaults in several sections, and the amendment Bill proposes fines and penalties instead for many of these. Similarly, the quanta of fines prescribed bymany existing provisions are proposed to be reduced. Since the introduction of the Companies Act, 2013, it was felt that the penal provisions of many of the administrative non-compliances were too harsh. At times, it was also felt that due to these stringent provisions, many professionals were reluctant to accept key corporate governance positions, such as director, independent director, top managerial posts such as CFO or company secretaries, etc. Those who held such positions need to spend considerable time on compliances. Over the last few years, consciousness and focus on some compliances and corporate governance areas has improved, and there are many other regulators involved in monitoring corporate functioning. Hence, decriminalisation is a timely step in the right direction.

Some of the matters where such relaxations are provided include variation in rights of shareholders, matters to be included in prospectus, notice to be given to registrar, reduction of share capital, filing of documents with registrars, proxies, disclosure of interest by directors and related party provisions, maintenance of various records and registers, provisions of buy back etc. It should be noted that there are no relaxations in more serious offences and non-compliances.

The proposed decriminalisation is wider and long term in nature. These relaxations would enable management to focus on business and balance the compliance burden with business management. This proposal will also boost the confidence of global stakeholders and investors, who have viewed some of these penal provisions as quite harsh. Lowering of these penalties may also encourage corporatisation of smaller businesses. Further, the imposition of monetary penalties in lieu of criminal prosecution will reduce the burden of the judiciary.

Typically, the responsibility of adhering to compliances within the Act lies with the CFOs and company secretaries in addition to the Board and senior management. The relaxations proposed will reduce their concerns. This may enable better discharge of their duties and focus on the business. However, CFOs should continue to take the compliances seriously and continue to strengthen the corporate governance in the organisations.

There are few other enabling proposed amendments as well in the Bill—for example, direct overseas listing. Currently, under the Indian regulations, Indian companies are not able to list their equity shares in the overseas capital markets, if they are not listed in Indian markets. In many cases, listing in overseas capital markets such as NYSE or Nasdaq offer companies several benefits such as incremental valuations, cheaper cost of capital, access to capital, building global brands etc. This move by the government to permit direct overseas listing is a much awaited reform which may particularly benefit many Indian companies and have far reaching positive impact on globalisation of Indian companies and their brands.

There are also enabling amendment to exclude from the definition of listed companies, certain categories of private companies which may have their debt instruments listed. This will further reduce the compliance burden on such companies. However, the detailed rules in this regard are awaited, and this may also require changes in SEBI rules.

It should be noted that the civil and criminal measures continue to remain for more serious offences, for examples in the matters relating to fraud, those that cause “injury to public interest or deceit”, monetary matters etc. However, the proposed amendments bring a balance between the nature of non-compliances & defaults and the consequences of those. Board of directors, investors and shareholders take compliances seriously irrespective of the amount and nature of consequences. Therefore, compliances need to be built in the governance framework of the companies.

Regulators seem to have looked at the Act comprehensively and decriminalised non-compliances which are in the nature of administrative, technical and those without any intent of causing any harm to stakeholders. In addition, many changes were also made to support ease of doing business through this pandemic. The level of corporate governance and self-regulation in companies will further encourage regulators to decriminalise more provisions of the Companies Act.

The author is Partner, Deloitte India. Views are personal