News

Published: June 12, 2023
Updated: June 12, 2023

RoCs Taking Disciplinary Action Against Non-Compliant Companies for Governance Lapses

Registrars of Companies (RoCs) in India are cracking down on companies that fail to fulfil mandatory disclosure requirements and hold a minimum number of board meetings per year. Regulatory orders reveal that RoCs have taken enforcement action against several companies, highlighting their focus on ensuring compliance with governance and disclosure obligations. This article explores the penalties imposed on defaulting companies and directors, provisions for small companies and startups, key compliance requirements under the Companies Act, and the importance of educating directors about regulatory requirements.

Penalties Imposed on Non-Compliant Companies and Directors:

RoCs have issued over a dozen regulatory orders this year, imposing penalties on companies that have not made mandatory disclosures after incorporation or failed to hold a minimum of four board meetings per year. Companies faced penalties of ₹25,000, while defaulting directors were penalised up to ₹100,000 for each year of non-compliance. Failure to pay penalties within three months can lead to substantial fines and potential imprisonment for defaulting officials.

Relief for Small Companies and Approved Startups:

The Companies Act, 2013 provides some relief for small companies and approved startups. RoCs consider lower penalties for these entities, ensuring that they are not subjected to excessive fines. Penalties for small companies cannot exceed half of the general provisions, with a cap of ₹200,000, while defaulting officers face penalties capped at ₹100,000.

Disclosure Requirements and Penalties:

According to the Companies Act, businesses must file a declaration within six months of incorporation, confirming that share subscribers have paid the value of shares. Failure to comply with this requirement, along with failing to file a verification of the registered office, has resulted in nine penalty orders being issued since April. Commencing operations or borrowing without making this disclosure is prohibited.

Obligation to Hold Board Meetings:

The Companies Act mandates that every company must hold a minimum of four board meetings per year, with no more than four months between any two meetings. Numerous companies have defaulted on this obligation, leading to penalties being imposed. In some cases, company secretaries were also held accountable. Five penalty orders have been issued for this violation since the beginning of the year.

Importance of Educating Directors:

The responsibility for ensuring compliance lies with the compliance officer, but directors should remain informed about the latest regulatory requirements. Manoj Raut, CEO and Secretary General of the Institute of Directors (IOD), emphasises the importance of educating directors about their responsibilities. In a globalised economy, businesses need to showcase transparency and good governance practices to thrive, even if they are family-run. Independent directors play a crucial role in protecting the interests of minority shareholders and overall shareholders.

Registrars of Companies in India are taking decisive action against companies that fail to meet governance and disclosure obligations. Penalties have been imposed on non- compliant companies and directors, emphasising the need for adherence to regulatory requirements. Small companies and startups receive some relief, but compliance remains crucial. Educating directors about their responsibilities and keeping them updated on regulatory changes is essential for ensuring transparency and good governance practices in businesses. By prioritizing compliance, companies can foster trust and succeed in today's globalized digital economy.