A Government committee has recommended companies to declare commencement of business in order to curb shell companies. It has also suggested capping independent directors’ remuneration.

The report also touches upon certain essential elements related to corporate governance such as declaration of commencement of business, maintenance of a registered office, protection of depositors’ interests, registration and management of charges, declaration of significant beneficial ownership, and independence of independent directors.

These are part of the recommendations of a committee under the Chairmanship of Corporate Affairs Secretary Injeti Srinivas which submitted its report to the Finance and Corporate Affairs Minister Arun Jaitley on Monday.

The committee’s view assumes significance especially as the Government is going all out against shell companies.

Technically speaking, there is no specific definition of a shell company under the Company Law. However, such companies are formed to launder money and thus become instrumental in generating black money. Keeping this in mind, the committee has recommended, the “re-introduction of declaration of commencement of business provision to better tackle the menace of ‘shell companies’.”

Corporate governance

Other recommendations related to corporate compliance and corporate governance include imposition of a cap on independent director’s remuneration in terms of percentage of income in order to prevent any material pecuniary relationship, which could impair his independence on the board of the company and holding of directorships beyond permissible limits to trigger disqualification of such directors.

The committee wants greater disclosures with respect to public deposits, particularly in respect of transactions exempted from the definition of public deposits under Section 76 of the Act to prevent abuse and harming of public interest.

It has suggested huge reduction in time-limit for filing documents related to creation, modification and satisfaction of charges and stringent penal provisions for non-reporting. It also said that once a company obtains restrictions under Section 90(7) relating to significant beneficial ownership, in respect of shares whose ownership remains undetermined, such shares should be transferred to the Investor Education and Protection Fund if rightful owner does not claim ownership within a year of such restrictions.

The Committee undertook a detailed analysis of all penal provisions, which were then broken down into eight categories based on the nature of offences. It recommended that the existing rigour of the law should continue for serious offences covering six categories. For lapses that are essentially technical or procedural in nature—which mainly falling under two categories—may be shifted to an in-house adjudication process.

“This would serve the twin purposes promoting of ease of doing business and better corporate compliance. It would also reduce the number of prosecutions filed in the Special Courts, which would, in turn, facilitate speedier disposal of serious offences and bring serious offenders to book,” the committee said.

De-clogging NCLT

The report also makes recommendations for de-clogging the National Company Law Tribunal (NCLT) through significant reduction in compounding cases before the Tribunal. Here are the recommendations restructuring of Corporate Offences to relieve Special Courts from adjudicating routine offences:

    • Re-categorisation of 16 out of the 81 compoundable offences by shifting them from the jurisdiction of special courts to an in-house E-adjudication framework wherein defaults would be subject to levy of penalty by the authorised adjudicating officer (Registrar of Companies)
    • Remaining 65 compoundable offences to continue under the jurisdiction of special courts due to their potential misuse
    • Similarly, status quo recommended in respect of all non-compoundable offences, which relate to serious corporate offences
    • Instituting a transparent online platform for e-adjudication and e-publication of orders
    • Necessitating a concomitant order for making good the default at the time of levying penalty, to achieve better compliance

In order to de-clog the National Company Law Tribunal (NCLT), the committee has suggested enlarging the jurisdiction of the Regional Director with enhanced pecuniary limits for compounding of offences under section 441 of the Companies Act 2013 (the Act).

It recommended vesting in the Central Government the power to approve the alteration in the financial year of a company under Section 2(41); and conversion of public companies into private companies under section 14 of the Act.

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