Introduction

“Compliances” are inevitable certainties for companies. The provisions of the Companies Act, 2013 (“Act”) and various rules formulated under it prescribe the various compliances and the way companies[1] must fulfil them. The Act provides for 4 (four) meetings of the board of directors to be held in a year[2]and also prescribes a penalty[3] of INR 25,000 on “every officer” of a company responsible for giving notice about such meetings but failing to do so. Similarly, the Act provides for how the financial statements of a company are to be prepared and approved inter alia by the board of directors[4] and provides for the imposition of a penalty of three lakh rupees on the company for default in compliance with the requirements prescribed.[5]

This year has also seen various instances of imposition of penalties on companies for their failure to notify “significant beneficial owners”.[6] Besides penalties for failure to abide by regulatory compliances, the scheme of the Act also provides for penalties in matters of investigation, such aspenalties on a director and/or officer of the company for not cooperating with the investigation initiated by the Registrar of Companies[7] (“RoC”) and/or by the Serious Fraud Investigation Office[8]. The RoC of Gujarat, Dadra, and Nagar Haveli, in the matter of Hatian Huayuan, vide order dated January 31, 2023,[9] imposed a penalty of INR 50,000 on the statutory auditor of the company under Section 450[10] of the Act for failing to provide the documents requested, which was a violation of Section 207(3)[11] of the Act.

The Act provides for myriad compliances and penalties, but at first blush it may appear that it does not expressly set out the adjudication ofthese penalties. However, that is not the case. Section 454 of the Act confers powers on the Central Government to adjudicate penalties under the Act, as may be prescribed. The procedure for adjudication of penalties is set out in the Companies (Adjudication of Penalties) Rules, 2014 (“CAPR”), enacted under the power conferred under Section 454 of the Act.

This article considers the general background of the CAPR – relevant authorities, brief procedure, etc. – and analyses the recent amendments to the CAPR, which, among other things, have digitised the adjudicatory process.

Adjudication under the Companies Act

The right to a fair hearing and a chance to present one’s case are inherent to any adjudicatory process. Proceedings under the CAPR are no different. This is reflected from a conjoint reading of Section 454 of the Act and the CAPR. The CAPR provides for a two-stage adjudicatory process. The authority of the first instance is the jurisdictional RoC, also referred to as the Adjudicating Officer (“AO”). The jurisdictional Regional Director (“RD”) is the appellate authority.

Section 454 of the Act specifies that a reasonable opportunity for a hearing be provided before the imposition of a penalty. The AO is conferred with the power to summon and enforce attendance of documents and direct production of documents/evidence.[12] Thus, the proceedings under the CAPR are quasi-judicial in nature. While the strict rigours of procedure and evidence may not apply, the authorities under the CAPR must necessarily adopt a judicious approach to ensure compliance with the principles of natural justice.  

Section 454 of the Act further allows an AO to impose penalties on a company, an officer in default of a company, or any other person for non-compliance or default under the Act; and direct the rectification of such default. Show Cause Notices (“SCN”) for non-compliance or default may be issued for matters pertaining to significant beneficial ownership,[13] maintaining a registered office,[14] filing of financial statements,[15] compliance with CSR provisions,[16] appointment of directors,[17] constitution of committees,[18] etc., and the AO may levy subsequent penalties following the procedure laid down in the CAPR. The CAPR provides for the AO to issue a notice, giving the notice a period of 15 to 30 days for showing cause for why penalty should not be imposed,[19] consider the reply received, allow for a personal hearing at his discretion,[20] and then pass an order after giving the party the opportunity of being heard.[21]

Further, even though Section 454 of the Act does not specifically provide for it, companies or officers in default may also apply to the AO suo moto if they become aware of a non-compliance (which does not have a direct consequential fine or penalty provision under the Act or has penalties (as opposed to fines or imprisonment) prescribed) and wish to rectify it. Such suo moto applications may be for matters such as delay in filing certain resolutions and agreements,[22] delay in holding board meetings or not holding sufficient board meetings in a year,[23] not maintaining the minimum number of directors,[24] etc. This too has been governed by the CAPR procedure, as applicable. However, with the amendment to the CAPR this year, the entire process for adjudication will now shift online.

Impact on Pending Proceedings

On August 5, 2024, the CAPR was amended to include a new Rule 3A,[25] which provided for conducting all proceedings before the AO and the RD electronically through the e-adjudication platform developed by the Central Government from September 16, 2024 (“Effective Date”). This includes processes such as issuing notices, filing replies and documents, presenting evidence, holding hearings, attending witnesses, passing orders, and paying penalties. However, Rule 3A, as it stood, did not clearly state what would happen to proceedings that were already initiated, in that it did not specify whether existing proceedings would continue as is or migrate to the e-adjudication platform. Hence, some confusion has arisen among the AO/RoCs and the companies regarding the procedure to be followed for existing cases.

The addition of the proviso to Rule 3A on October 9, 2024,[26] clarified that the proceedings pending before the AO and RD, as on the Effective Date, would continue as per the previous procedure. Hence, the e-adjudication requirement would apply only to proceedings initiated after the Effective Date. However, some uncertainty persists regarding the continuity of proceedings where an order is passed after the Effective Date under the previous procedure. In such a scenario, if the company chooses to appeal, would the appeal be according to the prior procedure or be adjudicated online? If adjudicated online, how would the documents and data be transferred, and could the initial technical glitches impact the strict timelines provided? While the previous CAPR also allowed some filings to be made online, the amended CAPR represents an overall change in terms of moving the entire process online.

The shift to an e-adjudication model for disputes under the Act is laudable and serves to improve the ease of doing business in theory, but the Ministry of Corporate Affairs (“MCA”) must do more to prepare companies and their officers to navigate the new system in place. The MCA has released FAQs[27] on the new e-adjudication module, highlighting in detail the process and powers of the authorities concerned. For instance, the FAQs describe how a company may revert to a SCN, attend a faceless hearing, submit documents online, and allow an authorised representative to attend. However, guidance is absent on how to navigate technical difficulties and procedural grey areas. These could have been anticipated, given that other regulators who had previously adopted faceless/e-adjudication mechanisms had encountered these issues. For instance, faceless assessment initiated by the income tax department faced a number of difficulties initially, from minor technical glitches, such as the file size allowed as an attachment, to major legal issues, the potential violation of the principles of natural justice by foregoing parties’ right to be heard due to lags in communication and crunched timelines not giving parties the opportunity to effectively present their case.[28] The MCA has definitely addressed the most common issues that could be faced, and it is likely that the other issues, too, would be resolved soon. Nevertheless, a formal clarification regarding the status of appeals pending under the prior mechanism would go a long way in assuring companies that everything is not left solely to case-by-case discretion.

The Effects of Digitisation

The RoCs handle a large volume of cases, passing roughly 600 orders until June this year.[29] Of these, at least 24 cases dealt with lapses in SBO compliance in the second quarter,[30] involving several multinational companies and global investment funds. These numbers are not inconsequential. The entire adjudicatory process of issuing a SCN, processing the reply, holding a hearing, and then drafting an order is lengthy and expensive for both the AOs and the companies. Shifting the adjudication process online through the amendments to the CAPR would not only potentially increase the speed of adjudication but also reduce logistical difficulties and streamline the process.

Further, companies have to regularly make decisions on handling and rectifying non-compliances as and when they occur. Depending on the type and severity of the default, a company or its officers may just have to deposit a late fee, opt for suo moto adjudication of a penalty, or opt for compounding in cases involving fines or imprisonment. Given the increasing number of RoC notices being issued to multinational companies, the ease of these processes is also a factor in the decision to rectify the defaults. Online adjudication would open the doors for companies being represented by more informed professionals and may even improve the subject treatment of these adjudication orders.

However, it is necessary to ensure that all companies have the requisite infrastructure in place to ensure these digital systems are accessible and viable. For instance, some small companies, charitable companies, or producer companies might not be able to fulfil the strict documentation requirements since their records might not be fully digitised, or be available in the correct formats. Additionally, they might not have the technical capabilities or the know-how to operate the online portal under the amended rules. It is necessary to provide some time for these companies to transition to the new procedure and not penalise them for failing to meet the requirements. Instead, there should be some training sessions for companies and their officers, or even an extension of the timeline, such as the one provided for the dematerialisation of shares, to ensure compliance and adherence with the new procedures.

Concluding Remarks

The move towards digitisation, nevertheless, has some apparent benefits for efficiency and convenience. In its ideal form, it eliminates the need to document and store bundles of letters, notices, and receipts and replaces it with a comprehensive portal where all details are readily available. Further, online hearings would save both time and resources for a company and ensure that its authorised representatives can attend hearings from anywhere, without wasting their valuable hours on travelling.  An automated system would also allow for easier authentication of documents and facts, leading to faster resolution of disputes besides lowering the administrative load for all stakeholders. Such a measure is beneficial not only from an ease-of-doing-business standpoint but also from a rule of law perspective since a digital system of adjudication would promote transparency and accountability. This vision may sound utopian, but it is very achievable if all initial hurdles can be smoothed out eventually. There may be some initial hurdles while companies familiarise themselves with the platform and the authorities adjust to the new way of doing things. However, once all stakeholders adapt to the new realities, the e-adjudication process envisaged by the recent CAPR amendment could function seamlessly in a truly “Digital India”.

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[1] The Companies Act, 2013, Section 2(20)- a company incorporated under this Act or any previous company law.

[2] The Companies Act, 2013, Section 173(1)

[3] The Companies Act, 2013, Section 173(4)

[4] The Companies Act, 2013, Section 134 (1) to (7)

[5] The Companies Act, 2013, Section 134(8)

[6] The Companies Act, 2013, Section 90

[7] The Companies Act, 2013, Section 207(4)

[8] The Companies Act, 2013, Section 217(6)

[9] Adjudication Order in the Matter of M/s. Price Waterhouse Chartered Accountants LLP, Statutory Auditors of M/S. Haitian Huayuan Machinery (India) Private Limited, https://www.mca.gov.in/bin/dms/getdocument?mds=GPKQUn8LlxO1fV5TwzCRiA%253D%253D&type=open

[10] Section 450 of the Act prescribes a punishment where no specific penalty or punishment is provided under the Act, of INR 10,000 with an addition of INR 1,000 per day till the contravention continues, subject to a cap of INR 2,00,000 for a company and INR 50,000 for an officer in default.

[11] Section 207(3) of the Act empowers the RoC or inspector making an inspection with all the powers of a civil court to call for production of documents, summoning and examining persons, and inspecting documents of the company at any place.

[12] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(10.

[13] The Companies Act, 2013, Section 90.

[14] The Companies Act, 2013, Section 12.

[15] The Companies Act, 2013, Section 137.

[16] The Companies Act, 2013, Section 135.

[17] The Companies Act, 2013, Sections 149 and 172.

[18] The Companies Act, 2013, Section 178.

[19] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(2).

[20] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(5).

[21] Companies (Adjudication of Penalties) Rules, 2014, Rule 3(6).

[22] The Companies Act, 2013, Section 117.

[23] The Companies Act, 2013, Section 173.

[24] The Companies Act, 2013, Section 149 read with Section 172.

[25] Companies (Adjudication of Penalties) Amendment Rules, 2024 dated August 05, 2024 available at 256076.pdf (egazette.gov.in)

[26] Companies (Adjudication of Penalties) Second Amendment Rules, 2024, dated October 09, 2024 available at 257790.pdf (egazette.gov.in)

[27] Frequently Asked Questions about the E-Adjudication Module: e-Adjudication-module-FAQs.pdf (mca.gov.in).

[28] Timsy Jaipuria, ‘Faceless tax assessment creating chaos and legal log jam, alleges industry’ CNBC TV 18 (November 17, 2023) available at Faceless tax assessment creating chaos and legal log jam, alleges industry – CNBC TV18; Deepshikha Sikarwar, ‘Makeover likely to give faceless I-T assessment a friendlier face’ The Economic Times (June 26, 2024) available at Makeover likely to give faceless I-T assessment a friendlier face – The Economic Times (indiatimes.com).

[29] Archana Rao, ‘MCA Steps Up Enforcement Against Non-Compliant Companies in India’ India Briefing (July 11, 2024) available at MCA Tightens Grip on Corporate Non-Compliance in India (india-briefing.com)

[30] Gireesh Chandra Prasad, ‘Four businesses penalized in last 2 weeks for lapses in reporting beneficial ownership’ Mint (July 29, 2024) available at Four businesses penalized in last 2 weeks for lapses in reporting beneficial ownership | Company Business News (livemint.com)