Compliances under Companies Act

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As India became a developing country, it saw a growth in the tertiary sector of economic activities. With such a progress, the corporate sector saw the ascent of various corporations. To regulate such a fast-growing market, The Indian Companies Act 1956 was remodelled to suit best the 20th century India.

It flows from common parlance that the nature of a corporation’s activities doesn’t just revolve around interest of personal nature, but affect the society at large. Putting into perspective the nature of its activities, it becomes highly important to regulate the undertakings of the same. Such a check can be both external or internal.

The external nature of form courses from legislation, that is, The Companies Act, 2013 and corresponding rules, whereas internal checks can be subject to a company’s own Compliance Committee.

To keep these companies on the right side of law, and to ensure their legal and rightful working as well as to ensure a standard code of conduct, it is necessary to lay down a few obligations on them. The word “Compliance” means ‘as the act of adhering to or conforming with a law, rule, demand, or request.’

When applied in the field of business, it requires for an organisation to abide by relevant rules and regulations and maintain a prescribed standard of management while undertaking its operations. Such usage attached to the word ‘Compliance’, with regards to Corporate law, was first used in the United States’ Financial System. Such were of penal nature to eventually ensure their obedience. 

To warrant corporate compliance, maintaining legality and recognizing standards, the Indian Companies Act of 2013 brought in about various changes and put forth multiple obligations on the Companies and their operation. This was all an effort to come at par with the Global Corporate standards. Under the Companies Act, Compliance can be divided into various categories like, After Incorporation Compliance, Annual Compliance, Event- based Compliance, Annual Accounting Compliance and Income-Tax Compliance. However, these are often also categorised on the basis of the kind of obligation they impose, likewise, Mandatory Compliances and Event-based Compliances.

Salient features of the Companies Act, 2013

The Companies Act of 2013 replaced the Indian Companies Act, 1956. It implemented various new sections relevant to the current trends of the Corporate Sector. The new act lays down more comprehensive provisions for listed as well as un-listed companies. The consequences of non-compliance are both far-reaching and far-sighted. The 1956 Act was dominantly based on the recommendations of the Bhabha Committee and was amended various times in the wake up changing circumstances.

The highlights of the Act of 2013 are:

  • Increase in the cap of the maximum number of Shareholders for a private company
  • Introduction of the provision of One-Person Company
  • Setting-up of Company Law Appellate and Company Law Tribunals
  • Making Corporate Social Responsibility mandatory

The key features of the Act are:

  1. Dormant Companies: The act recognizes and legislates the existence and operation of ‘Dormant Companies’, which have not engaged in business for two years consecutively.
  2. National Company Law Tribunal: The NCLT is a quasi-judicial body meant to adjudicate company law matters specifically and replaces the Company Law Board.
  3. Self-Regulation: The act crisply emphasises on self-regulating measures for companies to ensure the necessary disclosure and transparency.
  4. Mergers: The process for Mergers and Amalgamations and Cross-border Mergers have been simplified and made speedier.
  5. One-Person Company: Earlier such an option wasn’t allowed as the cap for a private company was two shareholders and two directors.
  6. Directors: New mandates strengthens and assures the decision-making powers of Independent Directors as well as women directors.
  7. Meetings and other procedures: The Act lays down a proper mandate for the company to follow and conduct its meetings in a prescribed manner.
  8. Audit: It further lays down auditing and accounting standards as acceptable, to ensure uniformity in standard procedure of assessment. It also calls for the establishment of a National Financial Reporting Authority (NFRA).
  9. Liquidation: Rehabilitation and Liquidation have been made time bound to avoid the long chapters of time invested amidst a financial crisis.
  10. Corporate Social Responsibility: After making CSR mandatory, India becomes the first country to do so, making the responsibilities of Companies towards the society a mandate.
  11.  Class Action Suits: The Act focuses protecting the interests of the Shareholders and making them more informed and to educate them about their rights, and hence the concept of class action suits.

Compliance under it Companies Act (for a corporation)

The Companies Act of 2013 lays down a few Compliances as discussed above to keep the companies under a check and to ensure a code of conduct for smooth and transparent functioning. Under the Act, non-compliance of the same attracts consequences of penal nature.

  1. After Incorporation Compliances

Each company needs to fulfil certain compliances under the Companies Act of 2013 right after its registration is successful. In order to confirm and establish this identity the Act lays down a certain set of compliances.

  1. Verification of Registered Office: For the purpose of acknowledging official communication and notices addressed to the company, the Act, after the incorporation of a company, mandates it to verify its Registered office with the Registrar of Companies. It can correspond to the same by filing in the SPICe form or the INC-22 form within 30 days of its incorporation.
    1. Display of Company Information: Each registered company should have a board displaying its Name, Company Identification Number (CIN), Address of Registered Office, Phone Number, Email or Fax if any outside its Registered Office.
    1. First Board Meeting: A Meeting of the Members of the Board should take place within 30 days of its incorporation. Further, the compliance in case of Board Meetings is quarterly in nature as four board meetings are supposed to be conducted in one financial year and the gap between two subsequent meeting shouldn’t be more than 120 days. For the operation of One-Person, Small and Dormant Company the mandate is to hold one meeting in each half of the calendar year, with a gap of not less than 90 days.
    1. Appointment of Statutory Auditor: Within 30 days of incorporation the company needs to appoint an Auditor in either the subsequent Annual General Meeting or in an Extraordinary General Meeting within 90 days of incorporation.
    1. Issuance of Share Certificate: Within 60 days of incorporation the company is obliged to issue share certificates in the name of the shareholders named in the incorporation document to set straight the course of interests involved.
    1. Disclosure of Interest of Directors:  Through form MBP-1 the directors are supposed to list of details of their interests in other registered corporations, including shareholding interests. Such disclosure is to be made in the first board meeting, or the first meeting of the financial year or whenever there is a change in the position of their interests. This is a yearly mandate.
    1. Maintenance of Minutes: the company is expected to record minutes of each meeting. The same is to be prepared within 15 days of the meeting and finalized within 30 days.
    1. Maintenance of Statutory Registers: According to Section 85 and 88 of the Act, a company is to maintain its statutory registers at its Registered Office which contain the register of Members, Shareholders, Charges, Employee stock options etc.
  • Annual Compliances

Few compliances are of annual nature are to be fulfilled by a company regularly as per the instruction laid down in the Act. Non-fulfilment of the same attracts penalty.

  • Annual General Meeting: The first Annual general meeting is to be organized within 9 months from the end of the Financial year (30 June) and subsequently within 6 months from the end of Financial Year (30 September).
    • Submission of Disclosure of Non-Disqualification:  In every financial year, directors are meant to fill in form DIR-2 disclosing any non- disqualification.
    • Director’s Report: Under Section 134 the Board of Directors are directed to prepare a report stating the state of affairs of the company, active charges, dividends, losses etc. Such is to be submitted with form AOC-4 at the time annual filing.
    • Financial Statements: Along with the Director’s and Auditor’s report a company is expected to ensure the circulation of financial statements.
    • Filing of Annual Returns: Under Section 92 of the Act, within 60 days of the AGM a company via form MGT-7 needs to file its annual returns, which should be digitally signed by at least one directors and certificated Company Secretary in practice. The standard procedure for One-Person and Small Company is different.
    • Filing of Financial Statements: Section 137 lays down that within 30 days of the AGM via form AOC-4 should file and update all its financial statements with the Registrar of Companies.
    • Corporate Social Responsibility: The Act lays down specific compliances for different types of corporations and companies. It provides certain philanthropic contributions to be made by corporate giants as a service to the society.
  • Event-Based Compliances

These are to be followed specifically in the wake of certain circumstances. This is to track the happening of certain events and update the data with the government.

  • Change in Directorship: In case of appointment, cessation or change in designation of the Board of Directors form DIR-12 is to be submitted within 30 days of such change.
    • Change in Registered Office Address: Depending on the new location the company needs to submit form INC-22 long with other required forms based on the change.
    • Change in any Charge: Creation, registration, amendment or settlement of any on-going or fresh charge is to notified via an e-form CHG-1 and CHG-4 respectively.
  • Accounting Compliances
    • Income Tax Returns: Adhering to the withholding tax compliances, a company needs to file returns and make TDS deductions on salary, interests, dividends etc. Quarterly returns are to be filed by prayer to the Income Tax Department.
    • GST Compliance: After the GST Registration, based on a company’s annual turnover it is expected to file its GST returns.

Penalties for non-compliance

The Companies Act, 2013 was drafted with an aim of creating a strict set of rules for the corporate sector. Therefore, the penalties or punishments as one may say, are more stringent and involves high amounts of fine. This step was interpreted by many companies as a double-edged sword, as on one hand it causes the necessary deterrence and ensures compliance, on the other companies raise the question of proportionality of such penalties. Section 447 of the act provides for punishment in case of fraud. Imprisonment is one common punishment for most contraventions. The act covers both civil and criminal liability against the illegal and non-compliant actions and operations of company and its officers.

As per the Act, there are three categories of consequences for non-compliance, namely, for companies, for officers in default, for persons other than companies and its officers. If any company fails to comply with any of the regulatory compliances laid down under the act, then the company as well as every officer in default shall be liable for such default. Such a penalty will be for the period which the default continues, meaning the penalties increase with the increase in the time period on non-compliance.

In the words of CS Shubham Katyal (2019) companies should remain fully compliant with all the applicable compliance requirements since “it takes less time to do things right than to explain why you did it wrong”. 

Conclusion

A company’s commitment towards following both internal and external compliances comes from the aspect of importance of compliance in the functioning of a company. It acts a strategic motivation for companies to avoid criminal or civil litigation of sorts. Being a separate legal entity, like a normal person, companies are supposed to follow existing rules or else can be sued or held in contempt. Hence, the objective clearly is to avoid and assess any criminal behaviour beforehand, in order to avoid any economic risks involved.

There is also an ethical component attached to the concept of compliance under the ambit of a company’s Corporate Social Responsibility. The stakeholders expect the company to not only adhere to rules and guidelines, but fulfil their expectations as per the virtues and ethical standards of practice. The motivation a company seeks from the same is that its reputation, credibility and trust among the sector is not deteriorated.

However, the critics of the concept of compliance express their concerns about its dubious representation in a few management circles. The same flows from the fact that as the demand for new industries arise, so arises a complex nature of activities of a company. In addition to this, it becomes rather hampering to the smooth operation of the business activities.

The complexity and changeability of such complex compliances are rather condemned by the companies. Nevertheless, where there is deviant behaviour, there has be compliances. Absence of the same might lead to illegal and unethical white-collar crimes.

Author: Anmol Mathur from Symbiosis Law School, NOIDA.

Editor: Tamanna Gupta from RGNUL, Patiala.

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