Panel Discussion on Role of CS in

Inspection

Adjudication & Compounding

By: CS Sriram ParthasarathyDirector, Prowis Corporate Services P Ltd.,

Todays’

Agenda

Introduction

Regulatory Framework

Deliberations

Floor Participation

2

REGULATORY FRAMEWORK

• Chapter XIV - Inspection, Inquiry & Investigation

• Section 206 to 229

• Companies (Arrests in connection with Investigation bySerious Fraud Investigation Office) Rules 2017

• Companies (Inspection, Investigation & Inquiry) Rules2014

• National Company Law Tribunal Rules, 2016

Relevant provisions

• Inspections & Inquiry: Sections 206 to 209

• Investigations:

• Section 210 – Investigation by Central Government

• Section 212 - Investigations by SFIO

• Section 213 – Investigation in Other Cases

• Section 216 – Investigation into Ownership of Company

• Section 228 – Investigation Etc., of Foreign Companies

REGULATORY FRAMEWORK

Compounding & Adjudication

• Compounding of offences U/s.441of CA, 2013

• Adjudication /Appeals – Section 454 of CA 2013 & Cos (Adjudication of Penalties) Rules 2014

What leads to Inquiry, Inspection or Investigations?

• Investor Complaints including Depositors & Shareholders

• Serious Complaints including Whistle Blowers

• References from other regulatories viz IT/SEBI/RBI

• Fraudulent transactions under IBC

• Bank Frauds/Defaults

• Criminal complaints filed through Central Economic Intelligence Bureau

• References from Regional Economic IntelligenceCouncil.[REIC]

• Data Mining at MCA through Early Warning System - byCorporate Data Management Cell [CDM cell]

• Market Research & Analysis Unit of SFIO ( from SEBI/Income tax & other Websites)

• Large Sized Companies & Companies made IPO

• Cos taking money through Bonds, Debentures , CollectiveInvestment Scheme etc.,

• Serious Auditors Complaints U/s.143(12) / Qualifications/ Adverse remarks on major violations of CA, 2013

• By Shareholders by passing Special Resolution u/s 212(1)(b)

• On Request from Department of Central/ State Government

• Public Interest

• Inadequate explanation furnished or unsatisfactory state ofaffairs exist in the company or the company does not disclose full& fair statement.

• Suo moto by ROC on filings of forms/documents

Inquiry, Inspections

Investigation –

Understanding the Differences

“Inquiry”

Inquiry may be initiated out of the documents filed with ROC or any information received by it or based on any compliant

Inquiry may be done by ROC directly or on directions of CG

Inquiry may lead to issue of Show Cause Notice

All Inquiry need not result in Inspection or Investigation

Inspection & Investigation may be the fallout of Inquiry

Inquiry will be restricted to those matters pertaining to thedocument or information & no personal visit.

Inquiry - Process• On Scrutiny of any document filed /information received, if ROC

is of the opinion that any further information is required by awritten notice to the company to furnish information or explanationwithin the time specified.

• Company/its officers (present/past) to provide such information

• If no information is furnished or information is inadequate or ifregistrar is satisfied that an unsatisfactory state of affairs exists anddoes not disclose full and fair statement of the information he mayby another WRITTEN Notice (also to record reasons in writing) callthe company to produce further books, papers, explanations as hemay require for his inspection at such place and at such time as hemay specify in the notice

• On the basis of the information available or furnished orrepresentations made by any person, the Registrar is satisfiedthat: (a) the business of the company is being carried on for afraudulent or unlawful purpose, or not in compliance with theprovisions of this Act; or (b) Investor’s grievances are notbeing addressed, the Registrar may after informing thecompany of the allegations made against it, require through awritten order to furnish in writing any information orexplanation within the specified time. Thereupon, theRegistrar may conduct such inquiry as he deems fit aftergiving the company a reasonable opportunity of being heard.

Inspection

• An Inspection may be carried out by Registrar as an outcomeof Inquiry after approval of CG if the Registrar is of theopinion that the inspection is required

• An Inspection may be ordered directly by Central GovernmentU/s.206(5) without conducting Inquiry u/s.206(4)

• Inspection may be ordered on Limited (specific) matters withterms of reference or for overall compliance for specific years.

• The Central Government may order, authorise any statutoryauthority to carry out the inspection of books of account of acompany or class of companies.

Inspection

• After Inquiry or parallelly, if inspector or registrar deem fit, thatthere is possibility of fraud and subject to writtenrepresentation received from Company, if it deems fit thatconduct of the company is not as per act or not in publicinterest or may harm the investor or stakeholder, theninspection may be carried out by respective officer appointedCentral Government or by ROC

• Inspection may involve personal visit to the registered office ofthe company and also can summon officers concerned.

Report on Inspection Powers of Regional Director

The ROC/Inspector shall after the inspection of BoA or an

inquiry U/s.206 & other books & papers of the company/s.207,

submit a report in writing to #Central Government along

with documents, if any, and such report may, if necessary,

include a Recommendation that further investigation into

the affairs of the company is necessary giving his reason

in support.

# [powers of CG delegated to RD vide SO 3557, dated 31st Dec. 2015]

New concept under CA 2013

• Information may be called from past employees.

• In case business of the company has been carried outor is being carried for fraudulent or unlawful purpose,every officer of the company who is in default shall bepunishable for fraud under section 447 of the Act.

• Central Government may as per general or specialorder authorize any statutory authority to carryoutinspection.

New concept under CA 2013

• Power of Civil Court are available to the RoC ininquiries'.

• Where Director/Officer of company is convicted foroffence under section 207 will be deemed to havevacated his office.

• RoC can recommend further investigation into theaffairs of company while making report of inquiry undersection 206/207.

Investigation

• It is a form of deeper probe into the affairs of a company & afact finding exercise.

• Objective is to collect evidence and to see if any illegal acts oroffences are committed

• It includes investigation of all its business affairs—profits andlosses, assets including goodwill, contracts and transactions,investments and other property interests and control ofsubsidiary companies too.

• It extends beyond the company viz., other body corporateassociated thereto including Foreign companies, Partnershipfirm, LLPs etc.,

Investigation

• Investigation may be ordered as a fallout of Inquiry orInspection.

• Investigation shall be ordered by CG

• Investigation shall be conducted by the Inspectorsappointed by the CG

“Investigation”

By Central Government U/s.210

By Tribunal U/s.213

By SFIO U/s.212

Investigations By CG U/s.210

• On receipt of report U/s.208 from the Registrar or Inspector

• On receipt of Special resolution passed by the company

• Public Interest

• Based on Order passed by Court or Tribunal in any proceedings

• In the above cases CG May order Investigation into theaffairs of the company by appointing one or more Inspectors

Investigations By Tribunal U/s.213

• The Tribunal may on an application by NLT 100 members or members holding NLT 1/10th of the TVP [Cos having share capital)

• (Or) NLT 1/5th of the person on the companies ROM [Cos not having share capital)

• Having evidence that they have good reasons seeking order for investigation (or)

• Application by ANY OTHER PERSON or otherwise, if its satisfied that

i) the business of the company is conducted to defraud its creditors/members or any other person for fraudulent or unlawful purpose orin a manner oppressive to any of its members or

ii) that the company is formed for any unlawful or fraudulent purpose

iii) Person concerned in formation of the company or the managementof the affairs in connection therewith being guilty of fraud,misfeasance or other misconduct towards the company or itsmembers

iv) Members have not been provided with information which theymight expect including information relating to calculation ofcommission payable to directors

• In the instance above, the Tribunal

• May order, for investigation by an Inspector(s) appointed by CG

• On such investigation if found that the allegations mentioned in (i) to (iii) above are proved then COMPANY & EVERY officer in default shall be punishable U/s.447

New Concept

• Central Government can order investigation in public interest.

• Company by special resolution request Central Government for investigation

Internal Guidelines & policy matters

Administrative Powers on Inspection

CG •PART A

RD •PART B

ROC •PART C

Authorities

To Prosecute

on

Inspection

Administrative Powers on Investigation

Central Government Sole authority to

sanction Prosecution of all offences

Powers delegated to Regional Director U/s.208 R/w. 458 of CA 2013

• To receive the report from Registrar or from the inspectorwhere such report recommends action for violation ofoffences under the Act for which imprisonment of less thantwo years is provided.RD Shall examine the report & obtainlegal advise, if required

• RD shall direct initiation of prosecution against the company,officers, employees [Past & present] or other persons, ifhe agrees with recommendation of the Registrar or Inspector

Contd.,

• RD shall inform the CG (along with reasons for non-acceptance of recommendation as aforesaid, wherever hedisagrees) about the action taken on the report submitted byRegistrar or Inspector.

• Exclusion: Violation u/s.127 [Punishment Failure fordistribution of dividends], U/s.177 [Audit Committee] &U/s.178 [Nomination & Remuneration & Stakeholdersrelationship Committee] – SHALL BE REPORTED ONLY TOCG – Internal Guidelines shall also be followed.

• On the above RD after taking legal advice submit report toCG seeking initiation of prosecution.

Internal Guidelines followed post Inspection for prosecution

PART – A

• Central Government will be the authority for granting

sanction for prosecution of all offences/violations which

carry PUNISHMENT OF IMPRISIONMENT of two years

or more together with or without fine & ALL NON-

COMPOUNDABLE OFFENCES except provided

otherwise.

• The residual offences not delegated to ROC or RD, rest

with Central Government

Part B

• The Regional Director will be the authority forgranting sanction for prosecution of offences/violationof certain Sections viz.,

• Sections: 8, 73(2), (3) & (5) [73(2) (a) & (b) by ROC],76, 77 to 85, 92(4),(6) 117(1), 118(12), 128, 129, 134,143(12), 139 to 146 [except 140(12)], 139, 148, 152,156, 167(1), 184(1) & (2), 186 to 188,194, 206, 207(4) (i), 217,225, 405(1) (3), 454(7)

Part C

• The ROC will be the authority for granting sanctionfor prosecution of offences/violation of certainSections viz.,

• Sections: 2(41), 2(68), 2(71), 14(2), 16(1), 45, 49,64(1), 73(2),(3),(5), 88(1),(2), 89 (1), (2),(3),(6), 93,94(1), 96 to 98, 100 to103, 105(2), (5), (8), 109, 115,120, 121(1)(2), 123, 126, 137(1)(2), 138, 140(2)157(1) 165(1), 173(1)(2)(5), 174,175,179, 180, 181,192, 193, 196, 197, 202 to 204, 248(1) (2), 453

Recourse to the companies

• Representations to Show Cause Notices

• Adjudication /Appeals – Section 454 of CA 2013 & Cos (Adjudication of Penalties) Rules 2014

• Compounding of offences U/s.441of CA, 2013

• Relief U/s.463 of CA 2013 – Power of Court or High Court to Grant relief in certain cases.

• Section 482 of Cr.PC – To quash the proceedings.

• Special Court

Adjudication

“Fine to Penalty”

Criminal to Civil

“Regulatory Framework”

Section 454: Adjudication Of Penalties

Section 454 A Penalty For Repeated Defaults

Companies (Adjudication Of Penalties) Rules,

2014

“Adjudication”

Why Adjudication?

Administrative Reasons / Timelines

Decriminalisation/ For breach of civil obligations

Difference between Penalty & Fine

“Fine & Penalty”

Fine can be imposed only by a court of law, but

penalty may be imposed even by an administrative

office(r).

There are several sections of the Act that impose

‘penalty’ for any non-compliance or default.

“PENALTY” is for default or failure of statutory obligation

(breach of civil obligation). CA, 1956 did not contain

such provisions.

“Fine & Penalty”

Penalty is imposed as a compensatory measure or for breach of

civil obligation whereas, Fine is imposed as a punitive measure

Depends on the nature of offences viz., CIVIL offence or Criminal/

Quasi Criminal offence

Quasi Criminal/Criminal offences – “mens rea” is essential factor

whereas there is no need to establish it in case of civil offence.

Breach of civil obligation, penalty may be levied by adjudicating

officers. Cases involving quasi-criminal/ criminal offences, penalty

may be imposed by way of FINE (AS A PUNITIVE MEASURE)

ADJUDICATION PROCESS & PROCEDURE

Show Cause Notice: Indicating the nature of non-compliance or default to the

company and to every officer of the company who is in default, to show cause, within

such period as may be specified in the notice (not being less than fifteen days and

more than forty five days from the date of service thereon), why the inquiry should

not be held against him. (May be extended by a further period not exceeding fifteendays, on request)

Notice for Hearing:

After considering the reply for the SCN, the Adjudicating Officer (AO) if is of the opinionthat an inquiry should be held, he shall issue a notice fixing a date for the appearance of

such company/officer

Hearing & Passing of Order:

After giving a reasonable opportunity of being heard, the AO may, subject to reasons

to be recorded in writing, pass any order levying the PENALTY including an order foradjournment of the hearing to a future date. The AO shall send the copy of the orderto the company/officer & Central Government.

Ex-parte Hearings

If any person fails, neglects or refuses to appear before the AO, he may proceed with

the inquiry in the absence of such person after recording the reasons for doing so.

The penalty shall be paid within 90 days from the date of receipt of the copy of theadjudication order. All sums realised by way of penalties under the Act shall becredited to the Consolidated Fund of India.

Quantum of Penalties & factors responsible: While adjudging quantum of

penalty, the AO shall consider the following factors, namely:

a) the amount of disproportionate gain or unfair advantage, wherever

quantifiable, made as a result of the default;

b) the amount of loss caused to an investor or group of investors or

creditors as a result of the default;

c) the repetitive nature of the default (Section 454 A repeated

Defaults)

MOOT QUESTION? Whether Adjudicating authority/Officer has power to

decide on the quantum of Penalty?

“Terminology”Where the Adjudication Officer shall have discretion:

“Penalty which may extend to …………” –

Where the Adjudication Officer shall not have discretion:

“Penalty of” …………

“But not exceeding” ……..

“ Where minimum penalty is prescribed”

Moot Question: The the penalty levied by the AO be revised on

appeal to Regional Director?

REMEDY AVAILABLE AGAINST THE ORDER OF ADJUDICATING OFFICER

Appeal may be made to the Regional Director within 60

days with the grounds of appeal. RD, after giving an

opportunity may-

(i) Confirm the adjudication order; or

(ii) Modify the adjudication order; or

(iii) Set aside the adjudication order.

COMPOUNDING OF OFFENCES

TYPES OF OFFENCES WHICH ARE COMPOUNDABLE

The offences that are not mandatorily punishable with imprisonment are

compoundable, as enlisted below:

(i) Offences punishable with fine only

(ii) Offences punishable with fine or imprisonment

(iii) Offences punishable with fine or imprisonment or both.

In such types of offences, the punishment may or may not include

imprisonment.

REGULATORY FRAMEWORK

Section 441 : Compounding of certain offences (Corresponds

to Section 621 A of CA 1956)

Section 450 : Punishment where no specific penalty or

punishment is provided (Corresponds to Section 629 A of CA

1956)

Section 451 : Punishment in case of repeated default (NEW) –

“Company & every officer in default shall be punishable with

TWICE the amount of fine for such offence in addition to any

imprisonment provided for that offence.

• Basis of determination of compounding authority?

• How the fine amount be calculated for RD to compound the offence?

• Is it necessary that the Compounding application once made be admitted by authorities?

• Lesser penalties to small companies

Deliberations

General non-compliances

observed

Common non compliances observed

• Boards’ Report

• Secretarial Standards

• Corporate Social Responsibility.

• Reply to qualification/adverse remarks

• Related Party Transactions & its disclosure

• Committees & Policies

• Disclosure of Loans & Guarantees U/s.186

• Financial statements not in accordance with Schedule III,

OTHER MATERIAL NON COMPLIANCES OBSERVED

A. Contravention of Section 73 & the Cos. (Acceptance of Deposit

Rules) 2014.

B. Contravention of Section 186

C. Contravention of Section 185

D. Contravention of Section 42

Conclusion

“Roles, Responsibilities & Opportunities

Of/To

Company Secretaries !

THANKS FOR LISTENING

CS. SRIRAM PARTHASARATHYsriram@prowiscorporate.com