Govt eases penalties, makes compliance simpler for firms
Companies Act revamp seeks to improve ease of doing biz
NEW DELHI: The government on Wednesday cleared a raft of measures aimed at improving ease of doing business, including a moderate penalty regime for all offences barring grave ones, allowing companies to list overseas and the freedom to offer independent directors higher remuneration.
The major revamp of the Companies Act, 2013, cleared by the Union cabinet, seeks to make compliance less rigorous for companies and attract foreign investments at a time the economy is going through a slowdown. The move is set to complement a low corporate tax rate regime rolled out in September.
The cabinet cleared 72 amendments to the Companies Act, 2013, Union finance minister Nirmala Sitharaman told reporters, adding that the proposed changes will make the law “more humane”. A bill to amend the Act is likely to be moved in Parliament during the current session to give effect to the changes.
The amendments seek to usher in a new regulatory architecture by moderating penalties for 52 of the 136 penal provisions that are there included in the Act after an earlier effort to decriminalize them in 2019. The proposals include reclassifying 23 compoundable offences to be handled under an in-house adjudication system of registrars of companies, dropping seven compoundable offences, removing imprisonment for 11 others, lowering penalties in the case of six others and allowing five others to be handled under alternative frameworks, explained an official statement.
The cabinet also decided to expand the scope of lower penalties for small companies and oneperson companies to cover all defaults as well as for startups and producer companies. The amount of penalty will also be capped.
Allowing direct listing of public limited companies in select foreign markets will allow newage companies with disruptive business models to raise capital abroad if they feel domestic investors are taking time to develop interest in them or to have the risk appetite, a government official said on condition of anonymity. “Such companies can get listed abroad on their own strength,” said the official. Finer details about the market as well as the class of companies to be allowed under the scheme will be notified as rules.
Sitharaman said a ministerial panel had studied sections of the
Companies Act that were troubling businesses. “Majority of the changes are to remove criminality of the offences where no mala fide is intended. The major thrust is to improve the ease of doing business and to decriminalize the law,” the minister said.
Besides these, a lot of steps are being taken to improve compliance, said Sitharaman. One key step is exempting companies, which have an obligation to spend ₹50 lakh or less, from the requirement of having a corporate social responsibility committee. “Also, if a company has spent more than 2% of net profit in one year, the general approach was to count only 2% under this obligation. Now, we are allowing the excess amount spent to be carried over to be adjusted against the obligation of subsequent years,” the minister said.
The proposals also include allowing companies with inadequate profits to offer remuneration to independent directors the way executive directors are rewarded. At present, managerial remuneration is capped at 11% of net profit and if a company needs to spend more, it needs shareholders’ approval. In the case of a company that has defaulted on loans, lenders’ approval is also needed. The same rules will now apply for the remuneration of independent directors once the changes become law, allowing firms to spend more to retain talent.
Chandrajit Banerjee, director general of Confederation of Indian Industry, said these steps will further the ease of living for law-abiding corporate houses and unclog the criminal justice system.