Companies Act panel wants penalties cut, sections decriminalised

NEW DELHI: The company law committee has recommended a fresh overhaul of the Companies Act to ease filing and compliance requirements while proposing decriminalisation of several provisions and lower penalties for small companies and startups.
TOI had first reported on September 19 that the government was looking to ease norms in the Companies Act. The panel has sought to provide comfort to audit firms and suggested that debarment should be rare and not the rule, and a system of deferred prosecution agreements may be worked out to give errant entities an opportunity to rectify their mistakes.
Loss-making cos may be able to attract better talent
In its report submitted to finance minister Nirmala Sitharaman on Monday, the panel has sought to provide comfort to audit firms and suggested that debarment should be rare and not the rule, and a system of deferred prosecution agreements may be worked out to give errant entities an opportunity to rectify their mistakes.
While this, along with easier rules for disqualification of directors, will be addressed in detail in the coming months, the committee has proposed amendments to 46 penal provisions to either remove criminality or limit punishment to fine. Besides, it has proposed rectification of default through alternate methods in a bid to unclog the criminal justice system.
Of the 66 remaining compoundable offences under the Companies Act, 23 will now be dealt with through an in-house adjudication mechanism instead of courts or tribunals. “In addition, the quantum of penalties recommended is lower than the quantum of fines presently (sic) provided in the Act,” an official statement said. Compoundable offences are those which can be settled by paying a fine.
In all, seven compoundable offences will be omitted, while in case of another 11, the provision for imprisonment is proposed to be dropped and five will be dealt with under alternative frameworks. Further, the quantum of penalty for six violations, which were shifted to the in-house adjudication framework earlier, is also proposed to be lowered.
The committee has also proposed to lower the monetary penalties on small companies, startups, one-person companies and producer companies as part of a series of measures towards “ease of living for law-abiding corporates”.
As part of the exercise, loss-making companies may be allowed to offer more liberal packages to non-executive directors to get better talent, while processes to speed up rights issues, exemptions from filing and fund-raising exercise are also planned, some of which will have to be done in consultation with Sebi.
The committee, headed by the corporate affairs secretary, has also suggested changes to the corporate social responsibility architecture, with the threshold to be reviewed. Currently, companies have to mandatorily spend 2% of their average net profit during the three immediately preceding financial years on CSR activities.
The government is looking to speed up amendments with the corporate affairs ministry expected to move a bill in the current Parliament session.