Introduction
India is in its “vocal for local” and “ease of doing business” (“EoDB”) era. Yet the slew of show cause notices and penalty orders the jurisdictional registrar of companies (“RoC”) has issued against Indian companies and its directors in the recent past[1] for alleged non-compliance of significant beneficial ownership (“SBO”) disclosures,[2] corporate social responsibility (“CSR”) contributions,[3] etc. under the Companies Act, 2013 (“Companies Act”), reflect the need for a well-balanced system.
While the regulatory push for self-reliance is strong, there is also a realization that Indian markets need to operate in new ways for foreign investments and businesses to thrive. It has become imperative that each government initiative and measure be implemented with a view to ensure that it achieves its desired intent and impact. It is also crucial to have regulators adept at working in tandem with industry needs to ensure government oversight while facilitating foreign investment.
The government has introduced a series of measures to promote EoDB, including automating form filing and processing by setting up the central scrutiny centre (“CSC”) and the central processing centre (“CPC”) and decriminalising offences under the Companies Act by settling them with penalties instead. Most stakeholders have largely welcomed these reforms, but the pace and manner of implementation by certain jurisdictional RoCs might have left some major multinational corporations (“MNCs”) with doubts about the intended consequences.
This blog delves into some recent adjudication orders issued by the RoCs and evaluates their impact on the promotion and regulation of business.
The Set Up – RoCs and the Various Centres
The Companies Act defines a “registrar” to mean a registrar, an additional registrar, a joint registrar, a deputy registrar, or an assistant registrar, having the duty of registering companies and discharging various functions under the Companies Act.[4] One of the primary functions of an RoC is to monitor violations and enforce compliance with the Companies Act.[5] The Ministry of Corporate Affairs (“MCA”) set up the CSC in 2021 to allow for straight-through processing of online forms filed by companies, without any manual intervention. This changed the compliance requirement from the need to obtain RoC approvals to an automatic process of obtaining an online acknowledgement of statutory filings, increasing the efficiency and ease of filing.[6] Subsequently, in 2024, the CPC was set up to expedite the processing of forms submitted by companies, resulting in the automation of the day-to-day filing and processing functions of the RoC and freeing it up to make more substantive and detailed inquiries.[7]
Additionally, the amendments to the Companies Act in 2020, which decriminalised multiple offences,[8] also increased the RoC’s powers and jurisdiction. While the RoC could impose penalties for 18 offences pre-amendment, it could adjudicate 58 non-compliances post amendment.[9] This almost concurrent increase in the RoC’s powers coupled with its operational capability due to automation has resulted in proactive enforcement. However, as on date, no rules or guidelines prescribe how the RoCs must exercise their discretionary suo motu powers. The lack of uniformity in enforcement by jurisdictional RoCs has the unintended consequence of their actions being viewed as not entirely “business or investor friendly”.
Unintended Consequences
Starting from November 2023, many companies received advisories and notices from the CSC and their jurisdictional RoC regarding compliance with the SBO framework. The rationale behind these CSC notices can be traced to the Financial Action Task Force (“FATF”) updating its recommendations on global money laundering and terror financing and asking India to strengthen its compliance by enforcing the Companies (Significant Beneficial Owners) Rules, 2018 (“SBO Rules”).[10] Even though companies had been taking steps to identify SBOs as per the SBO Rules, they started receiving notices from the RoC and facing action for non-compliance only recently.
As part of the adjudication process, the RoC is seeking extensive data in the form of global shareholding patterns or group structures, financial statements of overseas entities, bank authorisation details, and material price-sensitive commercial agreements. Sharing such information is not only sensitive from a business standpoint, but it could also open these companies to liability due to confidentiality clauses in contracts and data privacy laws in other jurisdictions. As per the Companies Act, a RoC has limited territorial jurisdiction, encompassing one or more states and union territories.[11] It has the power to seek information from a company registered under its jurisdiction, but the extent to which it can seek such information is unclear. The SBO framework in India is relatively new, and jurisprudence on it is developing slowly. The question, however, is whether such actions of the RoCs clearly fall within the domain of the powers of adjudication as granted under the Companies Act.[12]
To ensure uniform implementation across all RoC jurisdictions, the powers of adjudication of RoCs need streamlining in terms of objective tests, thus limiting discretion when it comes to imposing penalties. The recent LinkedIn RoC order[13] is a case in point. The RoC had adopted a wide interpretation and pinned the responsibility on the CEO of the global holding company – inarguably an employee – even though the reference to “senior managing official” was expressly excluded from the definition of SBO vide an amendment in 2019.[14] This expansive reading of provisions by the RoC, which goes beyond the legislative intent, risks paving the way for greater scrutiny on officers heading global holding companies who might not be involved in the Indian subsidiary’s operations. This potentially undermines the corporate veil and increases the compliance burden for companies.
Although Indian companies must ensure compliance with the MCA’s requirements on the SBO, persistent ambiguities and discrepancies in its application by different RoCs need to be settled through objective criteria. A clarificatory circular or a notification could help companies evaluate their corporate set-up accordingly and structure their board of directors and contractual arrangements to align with SBO provisions.
Recently, many companies have been receiving notices related to their CSR obligations. While the penalty provisions for CSR defaults have been in effect for a few years, the enforcement has increased recently, including for past procedural lapses that have not been repeated.[15] Such actions are completely within the RoC’s powers, but it needs to be mindful of penalties for historical CSR noncompliance in cases where such defaults were subsequently rectified.
Adjudication orders issued by the RoC are not final and there is a statutory right to appeal, but the affected companies/directors can only appeal to the Regional Director[16] or approach the jurisdictional High Court through a writ petition. These processes are often time consuming and increase the risk profile of a company. Thus, a more principled implementation would better balance the legal mandate with the EoDB requirements.
Concluding Remarks
Foreign investors, MNCs, and foreign holding companies require consistency and clarity in the legal regime for their business activities in India. Through the MCA, the government has brought about reforms to promote EoDB, such decriminalising offences, setting up the CSC and CPC, etc. These have increased efficiency and reduced delays in routine corporate and administrative procedures, but with domestic laws constantly evolving and international bodies such as FATF regularly updating compliance requirements for countries, there is a pressing need to align the well-intentioned EoDB reforms with a balanced implementation at the ground level, starting with the RoCs. To achieve steady growth, it is imperative to ensure good corporate governance and efficient business activity co-exist and that neither is prioritised at the cost of the other.
For further information, please contact:
Sreetama Senr, Partner, Cyril Amarchand Mangaldas
sreetama.sen@cyrilshroff.com
[1] This blog only deals with adjudication orders issued under Section 454 of the Companies Act, 2013.
[2] Order under Section 454 for violation of Section 90 of the Companies Act, 2013 in the matter of Nitin Life Sciences Ltd https://www.mca.gov.in/bin/dms/getdocument?mds=dgxLSropqQs5vU%252BkI0R6TQ%253D%253D&type=open; Order for penalty for violation under section 89 and section 90 of the companies act, 2013 in the matter of LinkedIn Technology Information Private Limited https://www.mca.gov.in/bin/dms/getdocument?mds=san%252BPg76sI9tkgd5lcHzZg%253D%253D&type=open; Order for Penalty under Section 454 for violation of Section 89(3) of the Companies Act, 2013 r/w Rule 9 of Companies {Management and Administration) Rules, 2014 in the matter of Maersk Holding BV https://www.mca.gov.in/bin/dms/getdocument?mds=zOQ3L4kAJh3Ycki0VwXGfA%253D%253D&type=open
[3] Adjudication order for violation of Section 135(5),135(4)(a) and 134(3)(0) of the Companies Act, 2013 in the matter of M/s Sivaraj Spinning Mills Private Limited https://www.mca.gov.in/bin/dms/getdocument?mds=4ycj9eh3EZOnvk8rBYI0HQ%253D%253D&type=open; Adjudication Order For Violation Of Section 135 Of The Companies Act, 2013 In The Matter Of Ceratizit India PvtLtd https://www.mca.gov.in/bin/dms/getdocument?mds=lUOyH5chx3To8tiPSDkLOw%253D%253D&type=open; Adjudication order for violation of Section 135(5),135(4)(a) and 134(3)(0) of the Companies Act, 2013 in the matter of M/s Sri Sankari Yarns Private Limited https://www.mca.gov.in/bin/dms/getdocument?mds=sY3cNxam0svjeXK12muy1g%253D%253D&type=open.
[4] The Companies Act, 2013, Section 2(75).
[5] For instance, the RoC may call for information regarding records, strike off the name of a company, and pass adjudication orders as per Sections 206, 248, and 454 of the Companies Act, 2013 respectively.
[6] Finance Minister Smt. Nirmala Sitharaman launches Central Scrutiny Centre Press Release:Press Information Bureau (pib.gov.in)
[7] MCA operationalises Central Processing Centre (CPC) for Centralised Processing of Corporate Filings Press Release: Press Information Bureau (pib.gov.in)
[8] The Companies (Amendment) Ordinance, 2018 dated November 02, 2018; The Companies (Amendment) Act, 2020 dated September 28, 2020.
[9] ‘Boost to Ease of Doing Business and Investment in the country Decriminalization of offences under the Companies Act, 2013’ ASSOCHAM available at https://www.mca.gov.in/bin/dms/getdocument?mds=nXllAwYIa6uGSNLsmr3CAQ%253D%253D&type=open
[10] FATF , International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, 2012 (updated November 2023) available at www.fatf-gafi.org/en/publications/Fatfrecommendations/Fatf-recommendations.html.
[11] Companies Act, 2013, section 396 read with Companies (Registration Offices and Fees) Rules, 2014, Rule 4.
[12] Section 454(3) provides that “ The adjudicating officer may, by an order-
(a) impose the penalty on the company, the officer who is in default, or any other person, as the case may be, stating therein any non-compliance or default under the relevant provisions of this Act; and
(b) direct such company, or officer who is in default, or any other person, as the case may be, to rectify the default, wherever he considers fit.”
[13]Order for penalty for violation under section 89 and section 90 of the companies act, 2013 in the matter of LinkedIn Technology Information Private Limited https://www.mca.gov.in/bin/dms/getdocument?mds=san%252BPg76sI9tkgd5lcHzZg%253D%253D&type=open.
[14] vide Companies (Significant Beneficial Owners) Amendment Rules, 2019.
[15] Gireesh Chandra Prasad, ‘RoCs tighten CSR enforcement; over a dozen businesses get penalty orders so far this year’ Mint (October 17, 2024) available at RoCs tighten CSR enforcement; over a dozen businesses get penalty orders so far this year | Company Business News.
[16] Section 454(5) of the Companies Act, 2013.
