Govt to decriminalise most violations of Companies Act: Nirmala Sitharaman

Finance Minister Nirmala Sitharaman (File image: Reuters)

Union finance minister Nirmala Sitharaman on May 17 announced that the government will decriminalise most of the violations of the Companies Act which was approved by the Cabinet in the first week of March.

The Company Law Committee headed by Ministry of Corporate Affairs Secretary Injeti Srinivasan recommended 46 offences to compoundable category.

CLC recommended dealing of compoundable offence by in-house adjudication mechanism which is at the rank of Registrar of Companies level officer.

A source close to the development told Moneycontrol, "Mainly violations regarding handling investors money and Section 447 of the Companies Act which is used against fraud are not part of compoundable offence. Otherwise, most of the violations are part of the compoundable offence."

Section 447 of the Companies Act says, "Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud."

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Easing of non-compliance burden will facilitate corporate India to focus on business revival without worrying about the regulatory compliance burden, said Rajesh Thakkar, Partner & Leader, Transaction Tax, BDO India.

However, this is not the first time such amendments have been made.

“This is another important announcement in the series of decriminalisation of the provisions of Companies Act, 2013. This is not the first time. The Companies Act, 2013 has been earlier amended to remove criminal punishment for many procedural and trivial offences. This is being done to facilitate ease of doing business for corporate” Lalit Kumar, Partner at J Sagar Associates.

A source close to the development told Moneycontrol, "CLC completed this report in less than two months and met only three times for completing this report which raises concerns over the quality of this report".

Sai Venkateshwaran, Partner and Head, CFO Advisory, KPMG India said that “While larger companies are better equipped to deal with their statutory reporting and compliance requirements while working from home, many of the smaller companies continue to face challenges in compiling information, timely filing and so on. Therefore decriminalisation of procedural defaults will come as a great relief for many of these companies, especially those who are defaulting due to genuine hardship as differentiated from willful defaults.”

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This reform reduces the strain on National Company Law Tribunal which is currently over-burdened. It will reduce timing compliance cost for smaller firms otherwise it takes years to get rid of minor violations.

The government is also increasing the benches of NCLT all over the country.

Dolphy, D'Souza Partner, SRBC and Co LLP feels that it is an overdue administrative reform, "Decriminalisation of minor and technical violations of the Company Law, is a good and long overdue administrative reform. In the past, the power to criminalize minor violations was being misused. An internal mechanism for compounding the offences will de-clog the criminal courts and NCLT, who are currently over-burdened".