Corporate compliance: Necessity and implication

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The Companies Act of India is the primary legislation governing the functioning of companies established in India during their lifecycle. The secretarial compliances refers to a list of periodic and event-based compliances dictated by the Act to be adhered to by companies incorporated in India. Failure to adhere to these compliances can become a costly exercise for a company that can be avoided.

The Act casts an obligation on the directors, company secretary and other senior officers of a company to comply with the various provisions of the Act, such as convening of periodic board and shareholders meetings, manner and modes in which the meetings are to be convened, manner of maintaining statutory records of the company, making event based and periodic filings in prescribed e-forms with the Ministry of Corporate Affairs (MCA), appointment of various officers and directors on breach of specified thresholds under the Act, all times having a registered office.

Any contravention of the provisions of the Act attracts penalties, which have been categorically prescribed by the Act, on the company concerned and its officers in default. The penalties may be either civil or criminal in nature or both. For instance, failure to maintain a statutory register namely; register of member may attract penalty of Rs50,000 (US$780), which may extend to Rs300,000 and with a further continuing penalty of Rs1,000 for the tenure during which the default continues or failure to properly prepare and sign the board’s report entails a penalty of Rs50,000, which may extend to Rs2,500,000 on the company and the concerned officers of the company would be liable to a penalty varying from Rs50,000 to Rs500,000 or imprisonment of maximum three years or both. Similarly, the Act prescribes penalties for each of the non-compliances which may have severe ramifications on the company and its officers. The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors and its authorised persons has been emphasised in many cases.

Actions by the authorities
It has recently been observed that the authorities have become more vigilant towards secretarial compliances and are initiating prosecution of companies and the officers of companies who are in default on the basis of the information available with them. There have been instances where companies and their concerned officers have been penalised heavily by the authorities on account of violation of the provisions of the Act. The authorities are not taking a lenient view even in case of non-compliances which are not of grave nature and have been penalising them strictly with the fine as prescribed under the Act. Recently, the MCA has issued notices to about a quarter million companies in India who are not carrying on any business or operations over the past two financial years and have failed to obtain dormant status from the Registrar of Companies. As per norms, the names of these companies would be struck off and the entities would be dissolved after providing them an opportunity of hearing. Since, the Indian government is focussed towards developing a regime of self-governance; the aforesaid steps are being taken to develop a compliance-based approach in the functioning of companies in India.

Conclusion
Considering, the increased focus of authorities on compliance under the Act and the extent of liabilities which a company or its directors/officers may incur on account of contravention of the provisions of the Act, it has become imperative on the part of the companies and their directors/officers to focus on corporate compliances in true letter and spirit. Adopting a post-mortem approach by companies in dealing with the corporate compliances may prove fatal for their financial as well as regulatory health.

The need and importance of corporate compliances can best be conveyed with the following quotation from Benjamin Franklin: “A little neglect may breed great mischief — for the want of a nail, the shoe was lost; for the want of a shoe, the horse was lost; for the want of a horse, the rider was lost; and for want of a rider, the battle was lost.”