Explained: Why is the Companies Act being changed?

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Written by

Karunjit Singh

, Edited by Explained Desk | New Delhi |


Updated: May 21, 2020 8:30:17 pm


Union Finance Minister Nirmala Sitharaman addresses a press conference on COVID-19 economic package, in New Delhi. (PTI Photo: Vijay Verma)

Finance and corporate affairs minister Nirmala Sitharaman on Sunday announced that the government was moving todecriminalise provisions of the Companies Actto enhance ease of doing business in the country as part of the government Covid-19 relief package. The move, which was initially announced on March 4, is part of a larger effort by the government since 2018 to remove criminal penalties from all provisions of the Companies Act, except provisions dealing with fraudulent conduct.

A number of offences previously classified as compoundable offences, i.e. those offences that had either imprisonment or fines as punishments have had the imprisonment penalty removed. Some of these offences have been omitted altogether while others have been shifted from the purview of the National Company Law Tribunals (NCLT) to an in-house adjudication mechanism.

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Why the change?

The move has been part of larger government efforts to boost ease of doing business since 2018. The recently decriminalised offences include administrative offences such as delays in filing CSR reports, or failure to rectify the register of members in compliance with orders from the NCLT. Experts point out that the decriminalisation efforts are really an effort to pull back on regulations introduced in 2014 aimed at boosting corporate compliance. The government had also introduced amendments to the Companies Act making violations of the Corporate Social Responsibility (CSR) provisions punishable by imprisonment but did not operationalise the provision after feedback from industry. The Companies Act amendment bill 2020 has also proposed to remove criminal liability from CSR provisions.

“With the overhaul of Companies Act in 2014, a lot more regulations were introduced for better compliance and therefore a number of penal provisions with both civil and criminal penalties were introduced” said Madhu Sudan Kankani, partner at Deloitte India, noting that as compliance levels improved and the government felt a need to boost ease of doing business the government started to relax criminal provisions.

What is the change?

The number of compoundable offences under the Companies Act have come down to 31 from 81 prior to the 2018 amendment to the Companies Act. A number of these offences have been moved from needing to be prosecuted through the National Company Law Tribunals to being dealt with by the Registrar of Companies. The RoC is empowered to decide penalties for these offences and companies can appeal to the Regional Director (RD) of the Ministry of Corporate Affairs (MCA) to appeal or seek modifications to these decisions. This move would help free up the bandwidth of NCLTs to deal with cases dealing with insolvency and other higher priority matters. The total number offences to be dealt with the in-house adjudication mechanism has risen from 18 in 2018 to 58 proposed in the latest amendment.

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What are the next steps?

According to experts, the ministry is expected to come out with further measures to decriminalise provisions in the companies act particularly those relating to auditors. An auditor with a leading audit firm said the MCA had announced that it would move towards removing criminal liability for issues such as negligence by auditors. “The ministry said they would remove criminal liability for a number of provisions dealing with auditors,” said the person noting that there was an issue with auditors being considered to be colluding with management if any fraud was found. The Company Law Committee had also in its report said that it would take up the matter of easing provisions of debarment of audit firms in the next phase of decriminalisation of the Companies Act. The corporate affairs ministry is however currently in the process of seeking debarment of audit firms Deloitte as well as KPMG affiliate firm BSR & Co. for their alleged role in the IL&FS scam.

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