Overdue correction: on revisiting the Companies Act(Hindu summary-17th July 2018)

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Overdue correction: on revisiting the Companies Act

The Hindu

Why in news?

  • The Centre has announced the constitution of a committee to recheck several provisions of the Companies Act, 2013 that impose stiff penalties and, in few cases, prison terms as well, for directors and key management personnel.

Context

  • The 2013 law entailed the first massive remodel of India’s legal regime to govern businesses that had been in place since 1956 and was borne of a long-drawn consultative process.

Ministry of corporate affairs (MCA) has constituted a 10-Member Committee to review the offences under the Companies Act, 2013

  1. To review the penal provisions in the Companies Act, 2013 it has been setup to examine ‘de-criminalisation’ of certain offences.
  2. The MCA seeks to review offences under the Companies Act, 2013 as some of the offences may be required to be decriminalised and handled in an in-house mechanism, where a penalty could be levied in cases of default.
  3. It can also allow the trial courts to pay more attention on offences of serious nature.

Details

  • The panel, which includes top banker Uday Kotak, has been given 30 days to work out whether some of the violations that can attract imprisonment (such as a clerical failure by directors to make adequate disclosures about their interests) may instead be punished with monetary fines.
  • It will also examine if offences punishable with a fine or imprisonment can be re-categorised as ‘acts’ that attract civil liabilities.
  • The committee has also been told to suggest the broad contours for an adjudicatory mechanism that issues penalties to be levied for minor violations, perhaps in an automated manner, with minimal discretion available to officials.

Challenges

  • Some of the provisions in the law are so tough, even a spelling mistake or typographical error could lead to be construed as a fraud and lead to harsh strictures.
  • The government hopes such changes in the regulatory regime should allow trial courts to devote attention to serious offences rather than get overloaded with cases as zealous officials pursue prosecutions for even minor violations.

Significance

  • The decision to build in harsh penalties and prison terms for corporate wrongdoing in the 2013 law was, no doubt, influenced by the high-pitched anti-corruption discourse that prevailed in the country at that moment in time.
  • Aside from several cases of crony capitalism that had come to light during the second UPA government, massive corporate frauds reported at once-revered firms such as the former Satyam Computer Services had spooked investors and other stakeholders about the credibility of corporate India’s books and governance standards.
  • The overall review of the Companies Act was at the top of industry’s wish list as a means to revive the economy. Industry captains had red-flagged the effect of such provisions on the ease of doing business, and investor sentiment in general.
  • It is also required to be seen as to whether any non-compoundable offences, namely offence punishable with imprisonment only, or punishable with imprisonment and also with fine under the Companies Act, 2013 may be made compoundable.

The terms of reference of the Committee are as follows:

  • To analyse the nature of all ‘acts’ categorised as compoundable offences viz. offences punishable with fine only or punishable with fine or imprisonment or both under the CA-13 and recommend if any of such ‘acts’ may be re-categorised as ‘acts’ which attract civil liabilities wherein the company and its ‘officers in default’ are liable for penalty;
  • To review the provisions ally to non-compoundable offences and recommend whether any such provisions need to be re-categorised as compoundable offence.
  • To investigate the existing mechanism of levy of penalty under the CA-13 and suggest any improvements thereon;
  • To lay down the broad contours of an in-house adjudicatory mechanism where penalty may be levied in a MCA21 system driven manner so that discretion is minimised.
  • To take required steps in formulation of draft changes in the law and other matter which may be relevant.

Conclusion

  • A trust deficit between industry and government owing to go astray incidents of corporate misconduct should not inhibit normal business operations.
  • The government is ultimately moving purposefully on this, a rethink perhaps triggered by the fact that private sector investment is so far to pick up steam and capital still seeks foreign shores to avoid regulatory risks.

 

 

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