Non-filing of financials by companies to be decriminalised

In a big relief to the corporate sector, non-filing of financials by the companies with the government may soon be decriminalised and recategorised as ‘civil wrong’ punishable with penalty only. Currently, non-filing of financial statement and annual return is a criminal offence with a provision of imprisonment as well as fine.

A high-level committee appointed by the government is likely to submit its report on the review of offences under Companies Act, 2013, to the Finance and Corporate Affairs minister Arun Jaitley today. The 10-member panel headed by the corporate affairs secretary Injeti Srinivas and comprising top banker Uday Kotak, industrialist Sidharth Birla and noted lawyer Shardul S Shroff among others has recommended decriminalisation of 16 offences including violations related to non-filing of financial statement and annual report, sources told DNA Money.

The maximum number of defaults under the Companies Act is on account of non-filing of financial statements and annual returns, a senior official said.

The committee has recommended shifting of 16 compoundable offences out of a total of 81 from the jurisdiction of courts to the in-house adjudication mechanism of the Ministry of Corporate Affairs (MCA) in order to relieve special courts from the burden of dealing with routine offences.

The panel has suggested that “some simple violations, including non-filing of financial statement and annual return, could be treated as civil wrong or default. Such cases can be adjudicated by the Registrar of Companies (RoC) with the Regional Director (RD) being the appellate authority. The adjudicating officer can levy a penalty on the erring company,” sources said. At present, the MCA files these cases in the National Company Law Tribunal (NCLT).

Currently, non-filing of annual return and financial statement by a firm is a criminal offence under section 92 and 137 respectively of the Companies Act. The law provides for a fine of Rs 50,000 with a maximum of Rs 5 lakh or an imprisonment of up to six months or both. A company has to file annual return with the RoC within 60 days and financial statement within 30 days from Annual General Meeting (AGM), mostly by October 30.

Annual return is a snapshot of the company’s yearly report which has information about the firm’s activities, financial position and composition, while financial statement, which includes balance-sheet, income statement, cash flow statement, is a record of the company’s financial position and performance.

The committee has reviewed about 80 sections involving criminal offences under the Companies Act with a provision of fine or imprisonment or both. Of these, 16 compoundable offences that are not of serious nature would be moved out of the purview of special courts to the in-house adjudication mechanism once the committee's report is accepted by the government. These include various filing related violations with respect to raising of capital and increase in authorised capital.

"The implementation of the report will warrant a Bill. The government is likely to introduce the amendments in the Companies Act when Parliament is reconvened," sources said.

"The committee has suggested decriminalisation of some offences but with a cautious approach considering that there has been a rise in the number of frauds. The minor offences where non-compliance is technical or procedural in nature can be recategorised as civil wrongs. The committee has, however, maintained status quo on serious and grave offences. The committee has tried to create a more friendly, remedy structure for small offences so that there is higher compliance by firms, said a source. On the other hand, the committee has given suggestions to make laws more stringent for serious offences while maintaining," the source said. This would also lead to courts getting more time to deal with offences of a serious nature, the source said.