Decriminalizing corporate law to improve governance

New Delhi: An expert panel led by corporate affairs secretary Injeti Srinivas recommended a host of measures last week to make penal provisions in the Companies Act, 2013, less onerous in case of minor offences and to improve governance, especially in ensuring objectivity of independent directors. The move is expected to reduce the number of cases reaching company law tribunals. Mint takes a look at the nature of these recommendations and their impact on businesses.

Committee proposals

The panel noted that trivial cases pending for long in courts impose a serious cost to the economy. It, therefore, makes a strong case for reclassifying less serious offences, technical defaults or procedural lapses under company law, so that these can be handled in-house by levying a fine within the corporate affairs ministry’s regulatory ecosystem, without having to conduct trial by a court. Such penalty will be levied using an online system so that there was no interface between company executives and regulatory officials. In essence, the panel suggested removing the element of criminality from minor offences and reclassifying them into mere blameworthy acts that carry civil liability.

How will this help?

This is expected to reduce the number of cases reaching the National Company Law Tribunal (NCLT). The NCLT benches and courts can instead focus on speedy adjudication of more serious offences. The panel did not seek to dilute penal provisions for serious offences, such as non-compliance of orders of statutory authorities or frauds, which will continue to be governed by existing legal provisions.

The in-house penalty system

Prohibition of issue of shares at a discount, accepting directorships in companies by executives beyond the specified number (20 in all and 10 in case of public limited companies), making certain disallowed payments to directors for loss of office, breech of overall managerial remuneration limit and non-appointment of key managerial person in case of companies, are among the offences proposed to be dealt within the regulatory ecosystem of the corporate affairs ministry.

The panel, however, said that offences, such as not keeping records of shareholders and significant beneficial owners, non-disclosure of interest by significant beneficial owners, not keeping books of accounts at registered office, violation of rules on share buyback, not repaying public deposits and violations relating to loans given to directors or companies related to them, involve public interest and have a bearing on the company’s continuation as a going concern.

These offences will not be covered under the proposed in-house penalty system.

New compliance requirement

The panel suggested restoring an earlier provision of the Companies Act, 2013, which mandated companies to report the receipt of capital from shareholders and file a form to verify the registered office before starting operations or borrowing. This requirement, the panel felt, will serve as an early warning system for tackling the problem of shell companies and, therefore, should be brought back.

Capping the pay of independent directors

The objectivity of independent directors and their ability to rise above situations of conflicting interest have been a corporate governance priority for the government. Excessive payment by businesses could compromise their functioning in protecting the interests of minority shareholders. The panel suggested that the total pay a director gets from a company, including subsidiaries and associates, other than sitting fees and reimbursement of expenses, should be capped at 20% of his or her annual income. The idea is to prevent independent directors to develop financial dependence on a company, which will come in their way of functioning.

source: livemint


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