India will soon take steps to make punishments under the Companies Act less harsh by ensuring that most violations are regarded as civil rather than criminal offences as the government looks to reassure investors and industry.
A criminal offence can lead to imprisonment for executives in the event of a conviction. Decriminalisation of the law has been attempted earlier, but many such instances remain.
Only the gravest breaches will remain criminal offences in the comprehensive cleanup being planned. “We are now looking at making most offences civil, except those dealing with serious frauds,” a senior government official told ET, adding that monetary penalties would be increased, in line with global practices.
These relate to existing provisions in the Companies Act that classify offences as criminal in nature and lead to jail. More than 40 instances of violations under the Companies Act are punishable by prison, according to an ET analysis.
The government has already decided not to operationalise the new corporate social responsibility (CSR) provisions in the recently amended Companies Act.
Strong Signal to Business Community
That would have made violations punishable by jail. ET had reported this on August 14.
The government is keen to send out a strong signal to the business community as the country battles a slump in demand and muted investment amid slowing growth. The move will also free up the courts from dealing with offences that are procedural in nature.
In his Independence Day speech, Prime Minister Narendra Modi laid down the marker, saying wealth creators should not be eyed with suspicion and that they should be respected.
In an interview to ET published on August 12, Modi had said he would do his best to make India a better place to do business. “I consider entrepreneurs as India’s growth ambassadors. I want to tell them that our government will leave no stone unturned to make India a better place to do business in all aspects,” he had said.
A host of violations under the companies law are treated as criminal offences and are punishable by imprisonment in contrast with the global practice of treating white-collar crimes, barring grave ones, as compoundable and settled with a fine.
Among those regarded as criminal offences are providing misleading information in a prospectus, refusal to register shares, tampering with the minutes of meetings, failure by a director to disclose his interest, loans given to directors in violation of rules and breaches of related-party transaction regulations.
Concern mounted after recent changes to CSR provisions made violations a criminal offence liable to jail of up to three years. The government responded swiftly to industry’s concerns over the specific provisions dealing with CSR norms introduced through an amendment to the Companies Act in the just-concluded session of Parliament and decided not to operationalise them. A similar exercise is now underway to decriminalise the Companies Act.
This will be in line with recommendations of a high-level committee headed by corporate affairs secretary Injeti Srinivas that gave its report a year back. The panel members included Kotak Mahindra Bank managing director and CEO Uday Kotak and Xpro Ltd chairman Sidharth Birla. The official said considerable work had already been done in this direction with 65% of offences under the companies law being classified as civil.
Some of the changes suggested by the committee have been incorporated. With regard to technical violations, amendments were made in the Companies Act, bringing them within the in-house adjudication mechanism. The government now wants to expand this further.
In the previous Companies Act (prior to 2013), all violations were regarded as criminal in nature. For example, even a one-day delay in filing the balance sheet led to prosecution. The 2013 Act decriminalised only some violations, prompting the setting up of the panel.
Experts said the acid test for punishment by way of imprisonment should be in case where persons are found guilty of fraud with the intent to deceive or to gain undue advantage or to injure the interest of stakeholders. “All other defaults should be punishable with fines,” said CSPavan Vijay, founder, Corporate Professionals.
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