Companies LawLegal Updates

Govt.’s constituted Committee makes recommendations related to corporate governance and De-clogging NCLT

MCA Updates

In July, 2018 Government had constituted a committee chaired by Shri Injeti Srinivas in order to review the framework dealing with offences under the Companies Act, 2013. On August 27, 2018 the Committee had presented the report after analysing all the penal provision.

In order to give the recommendation, Committee had broken down the penal provisions into eight categories based on the nature of offences. The committee has mentioned about various essential elements related to corporate governance such as declaration of commencement of business, maintenance of a registered office, protection of depositors’ interests, registration and management of charges, declaration of significant beneficial ownership, and independence of independent directors. However, Committee also mentioned that the cross-cutting liability under section 447, which deals with corporate fraud, would continue to apply wherever fraud is found.

Thereafter, Committee outlines the following recommendations in the report :

  1. Restructuring of Corporate Offences to relieve Special Courts from adjudicating routine offences:

(a)      re-categorization of 16 out of the 81 compoundable offences by shifting them from the jurisdiction of special courts to an in-house E-adjudication framework wherein defaults would be subject to levy of penalty by the authorised adjudicating officer (Registrar of Companies);

(b)      remaining 65 compoundable offences to continue under the jurisdiction of special courts due to their potential misuse;

(c)     similarly, status quo recommended in respect of all non-compoundable offences, which relate to serious corporate offences;

(c)     instituting a transparent online platform for E-adjudication and E-publication of orders; and

(d)   necessitating a concomitant order for making good the default at the time of levying penalty, to achieve better compliance.

  1. De-clogging the NCLT by:

(a)    enlarging the jurisdiction of the Regional Director with enhanced pecuniary limits for compounding of offences under section 441 of the Companies Act 2013 (the Act);

(b)   vesting in the Central Government the power to approve the alteration in the financial year of a company under section 2(41); and conversion of public companies into private companies under section 14 of the Act.

  1. Recommendations related to corporate compliance and corporate governance:

(a)    re-introduction of declaration of commencement of business provision to better tackle the menace of ‘shell companies’;

(b)   greater disclosures with respect to public deposits, particularly in respect of transactions exempted from the definition of public deposits under section 76 of the Act to prevent abuse and harming of public interest;

(c)    huge reduction in time-limit for filing documents related to creation, modification and satisfaction of charges and stringent penal provisions for non-reporting;

(d)   once a company obtains restrictions under section 90(7) relating to significant beneficial ownership, in respect of shares whose ownership remains undetermined, such shares should be transferred to the Investor Education and Protection Fund if rightful owner does not claim ownership within a year of such restrictions;

(e)    non-maintenance of registered office to trigger de-registration process;

(f)    holding of directorships beyond permissible limits to trigger disqualification of such directors; and

(g)   imposition of a cap on independent director’s remuneration in terms of percentage of income in order to prevent any material pecuniary relationship, which could impair his independence on the board of the company.

The committee further restated that the existing rigour of the law should continue for serious offences, covering six categories, whereas for lapses that are essentially technical or procedural in nature, mainly falling under two categories may be shifted to in-house adjudication process. The committee clarified that this this would serve the twin purposes promoting of ease of doing business and better corporate compliance.  It would also reduce the number of prosecutions filed in the Special Courts, which would, in turn, facilitate  speedier disposal of serious offences and  bring serious offenders to book.

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