Criminal offences in Companies Act to be slashed, govt mulls 65 changes

In a move to relax punishment for fraud under the Companies Act, the corporate affairs ministry is planning to withdraw the criminalisation aspect in 65 sections where the offences are compoundable or not serious in nature, a government official in the know said. 

“Criminalisation has had no worthwhile outcome. We will look at decriminalising most of the compoundable offences. Conviction can lead to many far-reaching consequences, which is not the intention of the law,” a senior government official said.

The offences punishable with imprisonment, a fine, or both are compoundable, and offences punishable with imprisonment and a fine are non-compoundable.

In the case of non-compoundable offences, which have an element of fraud such as criminal misappropriation of property or misinformation in the company prospectus, the government may create a provision for deferred prosecution or a compromise settlement if the public interest is not harmed.

This would be done on the lines of plea-bargaining under the Code of Criminal Procedure where the accused and prosecutors enter into pre-trial negotiations and the accused agrees to plead guilty in exchange for certain concessions.

New road map

  • Centre to revive committee for review of offences under Companies Act
  • Panel to look at 35 sections dealing with non-compoundable offences in second stage
  • No reprieve for serious frauds going against public interest
  • Deferred prosecution or compromise settlement for non-serious frauds 

The ministry will revive its committee on decriminalising offences under the Companies Act. It will work in two phases. In the first phase, it will look at the 65 sections where lapses are procedural or technical in nature and the offences are largely compoundable — where the complainant can enter into a compromise and agree to have the charges dropped against the accused.

Such offences include, for instance, default with respect to Section 8 (11), which deals with the formation of firms with charitable objects, and Section 26 (9), which is regarding matters to be stated in the prospectus.

Punishment in these cases includes a fine as well as imprisonment for the company’s directors or others involved.

“These are cases where default can be mitigated by paying fees, as a result of which you avoid penal provisions in connection with the default. It will be a breather for companies,” said Ankit Singhi, partner, Corporate Professionals.

In the second stage, the committee will study 35 sections that cover non-compoundable offences such as impersonating an owner of shares or an interest in a company under Section 57. This is punishable with a fine of up to ~5 lakh and imprisonment of one-three years.

“If it is a serious fraud there won’t be any relaxation. But if it is not so serious we can think about other options. This is a medium-term plan,” the senior official added.

The government has also decided not to commence the amendment to the law that added a criminal provision — imprisonment of up to three years — for non-compliance with the norms for corporate social responsibility. “It was more of a drafting issue but because there was so much apprehension we have stepped back a little,” the senior government official said.

A high-level committee on CSR in its report released earlier this week recommended that violations of CSR norms be made a civil offence. 

In the recently amended Companies Act, the government has decriminalised 16 sections. Most of these cover lapses such as prohibition on issues of shares at a discount or failure to file a copy of a financial statement with the registrar. Both the offences had a provision for a six-month prison term and a fine. The government has now restricted the punishment to a fine or penalty and done away with imprisonment.