In line with the government’s stated objective of promoting Ease of Doing Business, and in its ongoing effort to improve business sentiment in the face of economic slowdown, the Company Law Committee (CLC), set up by the Ministry of Corporate Affairs (MCA), has recently submitted its report, recommending decriminalisation of 46 compoundable offences under the Companies Act, 2013 (the Act). This list is in addition to the 16 compoundable offences already decriminalised by the Companies (Amendment) Act, 2019.
However, it is not the first time that India is trying to decriminalise business laws. The process began with the liberalisation of the Indian economy in 1991. The first commercial law that was decriminalised was the Imports and Exports (Control) Act, 1947. It was replaced by the Foreign Trade (Development and Regulation) Act, 1992, which decriminalised most of the offences relating to imports and exports. The most fundamental step in this direction was the replacement of the draconian Foreign Exchange Regulation Act (FERA), 1973, by Foreign Exchange Management Act (FEMA), 1999, which decriminalised offences relating to foreign exchange regulations.
The CLC has recommended decriminalising only compoundable offences. These are offences which are not punishable with imprisonment only or are punishable with imprisonment and also with fine. Offences which are non-compoundable will be dealt with under the regular criminal system and as per the provisions of Code of Criminal Procedure, 1973.
For ‘decriminalised’ compoundable offences, a new in-house adjudication mechanism (IAM) has been proposed under Section 454 of the Act. The MCA has notified the rules for adjudication of decriminalised offences, under which Adjudicating Officers (AO) will be appointed. They will have the authority to impose a penalty on the company, the officer in default or any other person and direct them to rectify the default. The AOs are also required to give affected parties’ reasonable opportunity of being heard and follow the principles of natural justice in the adjudication process.
If the AO’s judgement is not satisfactory, then the aggrieved person will have the option of appealing to the regional director (RD), who is also an officer appointed by the MCA. Currently, the law does not provide for a further appeal to the NCLT. CLC has deferred its recommendation to make a suitable amendment to the Act to introduce further appeal to NCLT for the next phase.
The CLC has categorised all compoundable offences in 8 categories and adopted a principle-based approach (mentioned below) to decriminalisation of offences. The CLC has also recommended penalty rationalisation in respect of six provisions.Principle-based approach:
Principle 1: Twenty-three offences that are minor – less serious compliance issues, and which can be objectively determined, will be transferred to the internal adjudication mechanism provided in Section 454 of the Act. Principle 2: Seven offences that can be appropriately dealt with under other laws will be omitted from the Act. Principle 3: Eleven offences which do not fit into 1 and 2 above, the CLC has provided an alternative method of imposing sanctions. Principle 4: Five offences that involve subjective determination but are not very serious violations, will be punishable with fine only. Principle 5: For 20 serious offences that may involve elements of substantive non-compliance requiring detailed adjudication, the CLC has recommended no change. A word of caution
There is no denying that India’s criminal justice system is badly choked, and it takes several years to reach a final outcome. Hence, in principle, any step taken to de-clog the criminal justice system is a step in the right direction.
More importantly, proving criminal offence requires the standard of proof to be beyond a reasonable doubt, a much higher threshold than the balance of probabilities standard adopted for civil wrongdoings. Many critics have, therefore, questioned the efficiency of criminal law in dealing with corporate misconduct.
However, those opposing decriminalisation have made a fair argument that corporates can treat these civil penalties as cost of doing business. In such a scenario, one wonders whether it will serve as a deterrent enough.
Keeping this in mind, it might have been more prudent had the decriminalisation of these offences been accompanied by very stiff monetary penalties for any violation. For example, Section 13 of FEMA, 1999 provides for a penalty of up to thrice the sum involved in such contravention.
Hence, it may be prudent for the law to strike a balance between civil and criminal corporate sanctions. For example: Offences involving the misuse of a substantial amount of public money must be dealt with under the regular criminal justice system.
It is also important to note that the CLC has carried out this entire exercise in less than two months and over just three meetings. One wonders if the CLC had adequate time to carefully evaluate the gravity of the offences before recommending decriminalisation.
There are also very sharp ‘U-turns’ by the CLC with respect to certain provisions. Eg. the provision relating to corporate social responsibility (CSR) under Section 135 of the Act, where originally no penalty was prescribed. By 2019 Amendment, a provision for imprisonment up to three years and a fine was introduced (though yet not notified). It is now proposed to decriminalise this offence.
Further, 2019 amendments to the Act have introduced a new Section 454A to deal with repeat offenders, where the offender has committed the same default within a period of three years from the date of the order imposing a penalty. In such cases, the law provides for twice the amount of penalty for every second or subsequent default. However, one wonders whether simply doubling the amount of penalty will act as a deterrent for habitual offenders. Repeat offenders should be dealt with under regular criminal law, with a provision for imprisonment.
It is astonishing to see how the CLC has recommended that a company (which is primarily incorporated for charitable and other social purposes, under Section 8) that violates the requirements imposed on such companies will be punishable with fines only. Similarly, offences under Section 26(9) of the Act, relating to the contravention of matters prescribed to be stated in the prospectus, and under Section 188 of the Act, relating to related party transaction are also very serious offences, affecting the larger public interest, should not be decriminalised.
There is also a view that adjudication of penalty is a quasi-judicial function and hence best handled by persons with a judicial background. It is now proposed to entrust this responsibility to officers appointed by the MCA. Even appeal lies to the RD, another layer in the bureaucracy.
A more calibrated approach needed
The Companies Act is like the Constitution of India for the corporate world. Adherence to its provisions in letter and spirit is of paramount importance to all stakeholders. Wholesale decriminalisation should not result in companies looking at the provisions of the Act very lightly. While no one is disputing the principle of decriminalisation, one needs to adopt a more calibrated approach to ensure that the Act does not become ‘toothless’ legislation. Additionally, the CLC should have perhaps suggested measures for strengthening Special Courts established under Section 435 of the Act. Presently, most states have designated one of the existing criminal courts as a ‘Special Court’ and its functioning does not inspire any confidence, neither have the Special Courts made any significant improvement in the rate of disposal of cases.
While the recommendations of the CLC are likely to be tabled in the on-going winter session of Parliament, it is sincerely hoped that a more calibrated approach is adopted for regulating corporate conduct. Otherwise, there is a possibility that the needle may just move too far.
Bharat Vasani is Partner at Cyril Amarchand Mangaldas.