Companies Act Amendement To Decriminalize Offenses: FM

Union Finance Minister Nirmala Sitharaman has stated in her budget presentation speech that the government plans to amend the Companies Act to decriminalize civil offenses.

Offenses that could be decriminalized would include corporate social responsibility (CSR) violations as well as non-filing of tax returns.

It may be recalled that under the present Companies Act, directors of companies which have not filed their financial statements or annual returns for three continuous years are disqualified from reappointment as directors in the same company and appointment as directors in other companies for 5 years.

The disqualification provisions in the Companies Act became effective in 2014 but their impact was felt in 2017, when the Ministry of Corporate Affairs issued a notification disqualifying over 300,000 directors associated with companies that had failed to file statements/returns from the years 2013-14 onwards.

Since the disqualification provisions had come into force in 2014, the ministry's notification seemingly gave retrospective effect to the provisions. This was not well received with objections being raised by various stakeholders.

The government then came up with schemes for condoning delays by defaulting companies.

Writ petitions were also filed before various High Courts challenging the retrospective aspect of the Companies Act, with the Delhi High Court and the Gujarat High Court giving conflicting views which resulted in appeals before the Supreme Court of India.

The Companies Act had also introduced an obligation for companies to make corporate social responsibility (CSR) spends of at least 2% of their average net profits during the immediately preceding 3 financial years, provided they meet certain profit, net worth and turnover thresholds.

The CSR provisions of the Companies Act were amended twice since their introduction, with several changes aimed at clarifying ambiguities. Under the Act’s initial CSR provisions, the obligation to make CSR spends triggered if a company met profit, turnover or net worth thresholds in ‘any’ financial year.

The unclear drafting led to confusion on whether the thresholds had to be met in any one single financial year since a company's incorporation or only the preceding financial year. An amendment was required to clarify that only the immediately preceding financial year was to be considered.

Another amendment was made to rename permissible CSR matters as CSR ‘areas or objects’. The initial CSR provisions also required companies to constitute a CSR committee comprising at least one independent director but the provisions did not contemplate relaxations for companies that were not required to appoint independent directors.

Similarly, it was not clarified how CSR spends would be calculated for companies incorporated less than 3 years ago and hence more amendments were required to clarify these issues.

Lastly, and most notably, in 2019, CSR defaults were sought to be punished with criminal consequences. This resulted in an uproar from concerned stakeholders and a high-level committee that was formed to examine CSR provisions ultimately recommended decriminalization, but the amendment was eventually not given effect.

These concerns are likely to be addressed if the Companies Act is amended to decriminalize civil offenses, as promised by Union Finance Minister Nirmala Sitharaman in her budget speech.