Govt to promulgate an ordinance to bring 'urgent' changes to Companies Act

The government is set to promulgate an ordinance to bring amendments to the Companies Act with the ministry of corporate affairs moving a draft Cabinet note in this regard, according to sources.

The draft note in its introduction says the ministry is seeking “urgent changes to the Companies Act” based on the recommendations of the high-level committee that reviewed offences in the legislation. The ministry says these amendments are being sought to “strengthen the regulatory framework”. 

The ministry has drafted the note, being circulated to other ministries for consultations, following an internal review of the panel’s recommendations. The committee, set up to amend the Companies Act and headed by the corporate affairs secretary, explored decriminalising 83 offences compoundable under the Act, including those relating to the remuneration of directors. The panel suggested a ceiling on independent directors’ remuneration in terms of the company’s income to prevent any material pecuniary relationship, which could impair their independence on the board.

Experts say high fees by any one company can compromise independent directors’ independence.

These directors are paid in two ways — through sitting fees and commission. While the sitting fee is not a concern, it is commission which raises eyebrows. Commission could range from 1 to 3 per cent of a company’s net profit, depending on whether the company has a managing director, whole-time director or not.

The government plans to put in place a stricter disclosure framework for independent directors, including providing details about their resignation from companies, as part of continuing efforts to bolster corporate governance standards. The committee also recommended shifting 16 of the 81 compoundable offences from the jurisdiction of special courts to an in-house e-jurisdiction framework, where defaults could be penalised by adjudicating officer under the registrar of companies.

These offences relate to non-filing of annual returns, not providing permanent account numbers, not providing registered address in the letterhead, not giving director identification number, etc. The remaining 65 offences of serious nature will continue to be under the jurisdiction of special courts due to their potential misuse, according to the recommendations.

However, the status of all non-compoundable offences will be retained since they are serious in nature. The panel also recommended shifting of the compoundable offences to regional directors under the ministry of corporate affairs. Regional directors would be empowered to enhance pecuniary limits.

On the cards

• Clause on directors' remuneration to be amended
• A stricter disclosure framework for independent directors
• 83 offences compoundable under the Companies Act could be decriminalised
• Move aimed at de-clogging NCLT