Decriminalisation of Corporate Offences Under Indian Law

Abstract

To achieve sustainable success in reforms, it is essential to have ongoing monitoring and evaluation. Training initiatives for adjudicating officers will boost the IAM’s effectiveness. Frequent assessments of offences and penalties will assist in tackling emerging challenges and ensuring fair enforcement. Policymakers ought to collaborate closely with businesses and legal professionals to modify regulations in response to evolving markets. India’s move to decriminalise corporate offences marks a significant advancement in modernising corporate governance and aligning with international standards, which will encourage business growth. Enhancing quasi-judicial courts through data collection and electronic systems is also advisable. Continuous evaluation and engagement with stakeholders are crucial to maintain a balance between facilitation and accountability for a robust economy.

Introduction

India’s swift socio-economic transformations call for reforms aimed at improving regulatory balance and supporting businesses. By decriminalising corporate offences under the Companies Act, we encourage entrepreneurship by removing criminal penalties for minor infractions. This not only eases the pressure on businesses and the judiciary but also enhances compliance and growth while maintaining accountability and responsibility. The process of decriminalising corporate offences in India is gradual, mainly through the Companies (Amendment) Acts of 2019 and 2020, which aim to facilitate business operations by transferring minor, technical, and procedural violations from criminal courts to internal adjudication systems. This shift decreases litigation, promotes compliance, and simplifies processes by substituting imprisonment for certain offences with fines or civil penalties. Recent efforts include the launch of the Jan Vishwas (Amendment) Bill, 2025, which seeks to further decriminalise additional minor offences and lessen the load on judicial systems.

Decriminalisation of Offences

The Companies Act now comprises 124 penal provisions after undergoing a two-phase decriminalisation process.

Among these, 58 can be handled internally, while 66 require criminal proceedings.

The Amendment Act of 2020 has removed imprisonment for certain offences, limiting punishment to fines and reducing penalties in specific cases.

Decriminalisation marks a move towards removing provisions that define certain actions as offences. This isn’t a new concept for India; the journey of decriminalisation began in 1991 with the liberalisation of export and import regulations, which significantly reduced various criminal offences. After enduring years of hardship under the strict Foreign Exchange Regulation Act (FERA), it was eventually repealed, leading to the implementation of the Foreign Exchange Management Act, 1999. The primary goal of decriminalisation has been to enhance the ease of doing business. Recently, in the Companies Act Amendment, 2019 (CAA), the Ministry of Corporate Affairs has successfully eliminated 16 compoundable offences. Additionally, the ministry has proposed a Companies Amendment Bill (CAB) in the Lok Sabha, which aims to remove around 54 more offences. While the Bill has yet to receive parliamentary approval, the ministry has already taken some steps towards these changes. Therefore, we must comprehend both the advantages and disadvantages of these amendments.

Impact and Benefits

• Boosting FDI and Business Expansion: The government aims to draw in more Foreign Direct Investment (FDI) and promote the growth of local businesses by establishing a more predictable and less burdensome regulatory environment.
• Encouraging Compliance: Companies that follow the law are motivated to enhance their compliance efforts, leading to better corporate governance.
• Assistance for Startups and Small Enterprises: Measures such as lower penalties for small firms, sole proprietorships, and startups are designed to offer them a more feasible compliance structure.

Need for Reform

• The Companies Act of 2013 imposed stringent regulations that resulted in severe penalties for minor infractions, affecting both businesses and the judicial system.
• In response, the government initiated reforms to classify offences and guarantee equitable penalties, leading to changes through the Companies (Amendment) Acts of 2019 and 2020.
• Additionally, the Companies Act of 2013 transformed numerous minor offences into civil penalties.
• The Jan Vishwas Act of 2023 further broadened this approach to include additional statutes.

Key Amendments and Mechanisms

The Companies (Amendment) Act, 2019, initiated the decriminalisation of corporate offences by eliminating penalties for 16 minor infractions and introducing an internal adjudication system. Additionally, it transformed CSR violations into civil liabilities rather than criminal ones. The 2020 Act further decriminalised 46 additional provisions, substituted imprisonment with fines for 11 offences, and provided clearer guidelines for penalties. The internal adjudication system has effectively settled more than 1,000 cases.

Key Aspects of the Decriminalisation Process

• Companies (Amendment) Act, 2019: This first step removed the criminal status of 16 compoundable offences, transferring them to the In-house Adjudication Mechanism (IAM).
• Companies (Amendment) Act, 2020: This further lessened the criminal implications of 46 provisions by removing imprisonment for 11 offences, substituting it with fines and/or other civil penalties.
• In-house Adjudication Mechanism (IAM): A key result of these reforms, the IAM enables adjudicating officers to address minor defaults, instead of relying on the overloaded judicial system.

Positive Impacts on Corporate Governance

• The reforms have made it easier to conduct business by fostering a more welcoming atmosphere for companies. By reducing penalties for minor infractions, investor confidence has increased, motivating more individuals to launch businesses. Companies are now more inclined to adhere to regulations voluntarily, understanding that small errors won’t result in severe repercussions. This aligns with India’s goal of effectively utilising its workforce for business.
• These modifications also alleviate the burden on courts, enabling them to address more serious cases and allowing regulatory agencies to concentrate on compliance. Nevertheless, some critics express concern that this approach may appear overly lenient and could result in non-compliance. It is crucial to maintain strict penalties for serious offences to uphold trust in corporate governance while encouraging business expansion.
• Transitioning minor corporate violations to administrative adjudication accelerates the resolution of cases and frees up courts for more significant issues. Companies can reduce legal expenses by opting to pay monetary fines instead of enduring protracted court battles. The reforms streamline business operations, allowing corporate leaders to prioritise their activities over compliance challenges. Decriminalisation guarantees that minor infractions receive appropriate penalties, enhancing India’s attractiveness to investors.

Impact

• Transition from Criminal to Civil Liability: A significant number of corporate non-compliances are now regarded as civil or administrative violations instead of criminal offences, which entails lower proof requirements and milder penalties.
• Enhanced Efficiency: The shift towards IAM has resulted in the resolution of more than 1,000 cases and has diminished the necessity for companies to approach the National Company Law Tribunal (NCLT) for compounding their offences.

Challenges and the Path Forward

• Reforms need to strike a balance between supporting businesses and imposing strict penalties for any violations.
• Continuous evaluation and the involvement of stakeholders are essential for attaining positive outcomes without creating new compliance issues.
• Additionally, it is important to reduce dependence on criminal law for regulatory purposes.

Goals of Decriminalisation

• Enhance Business Operations: The objective is to enable smoother operations for Indian businesses by simplifying regulatory processes and reducing the likelihood of criminal charges for minor errors.
• Lighten Legal Load: The purpose is to alleviate the burden on courts and tribunals by shifting cases related to technical violations to a civil or administrative resolution process.
• Encourage Legal Adherence: The goal is to inspire companies to comply with the law by establishing a regulatory framework that is more predictable and less harsh for minor infractions.
• Boost Investment: The aim is to showcase a commitment to a more business-friendly regulatory environment, which will subsequently attract increased Foreign Direct Investment (FDI).

Budget Speech

On February 1, 2023, Finance Minister Nirmala Sitharaman announced that over 39,000 compliance requirements have been eliminated, and more than 3,400 legal provisions have been decriminalised to support businesses in India.

The Jan Vishwas Bill will modify 42 Central Acts to foster trust in governance. Additionally, the Finance Bill seeks to decriminalise certain aspects of the Income Tax Act and the Central Goods and Services Tax Act.

The emphasis has shifted from penalising businesses for minor infractions to considering them as civil wrongs. This adjustment aims to streamline company operations and minimise legal conflicts. However, serious offences such as fraud will continue to be treated as criminal acts. Now, penalties are determined by government officials rather than criminal courts.

Imposition of Penalty instead of Fine/ Imprisonment

The text makes a distinction between “penalty” and “fine.” A penalty is managed by the Registrar of Companies, whereas a fine is determined by a court. This article will examine the provisions that were decriminalised by the Amendment Act of 2020 and evaluate the effects of this decriminalisation.

The initial aspect of decriminalisation involves converting certain criminal offences into civil wrongs, which allows penalties to be resolved internally instead of through criminal courts. The Amendment Act of 2020 has revised numerous related provisions.

The act enumerates various offences along with their new penalties following decriminalisation. For instance, if a company fails to register a transfer of securities, it incurs a penalty of fifty thousand rupees. Not registering charges results in a fine of five lakh rupees for the company and fifty thousand rupees for the officer in charge. Additional penalties include three lakh rupees for not keeping a register of members and daily fines for not declaring beneficial ownership, capped at five lakh rupees.

Penalties vary for other offences as well. Non-compliance with corporate social responsibility regulations can result in fines of up to one crore rupees, while directors who do not disclose their interests face a fine of one lakh rupees. The act also permits fines instead of imprisonment for specific offences, such as charitable company formations, which can incur fines ranging from ten lakh to one crore rupees.

Omission of Offences

The Amendment Act of 2020 has eliminated various penalties from the Companies Act, categorising them into three groups. The first group consists of obsolete offences that will now be handled under the Tribunal’s contempt jurisdiction. The second group pertains to offences that will be resolved through other legal frameworks. The third group includes those that will be managed using alternative methods.

Specific offences that have been removed are non-compliance with Tribunal orders and certain issues related to cooperation, shifting the emphasis from penalties to collaboration. This move towards decriminalisation has led to a decrease in court cases, with more than 1,000 cases resolved by Registrars of Companies between 2018 and 2021. The aim is to foster a trust-based economy and promote the growth of businesses in India. There are plans to decriminalize offences in 42 additional Acts while ensuring that regulations remain in place to maintain investor confidence.

Recent Developments

• Jan Vishwas (Amendment) Bill, 2025: This proposed legislation seeks to further decriminalise additional minor offences to improve both the quality of life and the business environment.
• Total Offences Decriminalised: Due to these reforms, more than 63 minor offences under the Companies Act and LLP Act have been decriminalised.

Major steps taken by MCA

1. The decriminalisation of 63 offences under the Companies and LLP Acts aims to relieve corporations while also reducing the litigation burden in judicial courts and transitioning prosecution cases to adjudication.
2. More than 54 forms have been converted to a Straight Through Process (STP), which previously required approval from field offices.
3. The introduction of e-Form SPICe+, along with a linked form called AGILE PRO-S, allows for various services to be provided in one place, including Name Reservation, Incorporation, PAN, TAN, DIN, EPFO Registration, ESIC Registration, GST number, and Bank Account opening, enabling businesses to start immediately upon incorporation. Likewise, the new e-Form FiLLiP (Form for incorporation of Limited Liability Partnership) was launched to offer the same services in a single application.
4. The definition of a Small Company has been revised, raising the threshold limit for paid-up capital from Rs 2.00 Crore to Rs 4.00 Crore and for turnover from Rs 20.00 Crore to Rs 40.00 Crore. Additionally, the concept of a small LLP has been introduced, which entails fewer compliance requirements and lower fees to minimise compliance costs.
5. A Centralised Registrar of Companies (CRC) has been established to ensure uniformity in the incorporation process.
6. A Central Scrutiny Centre (CSC) has been set up for the centralised scrutiny of e-Forms submitted under STP.
7. A Central Processing Centre (CPC) has been created for the centralised processing of specific non-STP e-forms.
8. An e-Adjudication Portal has been launched for the adjudication of offences related to the Companies Act.
9. There is no fee for the incorporation of a company with authorised capital up to Rs 15.00 Lakh.
10. The fast-track process for mergers under the Companies Act, 2013, has been extended to include mergers between Startups and small companies, ensuring that the mergers and amalgamations process is quicker.
11. The scope of section 233 of CA-2013, which facilitates Fast Track Mergers & Amalgamations with the approval of Regional Directors, has been broadened. It now also includes the merger of a foreign transferor company, incorporated outside India (acting as a holding company), with its wholly owned subsidiary that is incorporated in India.
12. There is no cost associated with changing the registered office of a company.
13. Companies can now hold their Annual General Meeting (AGM) and Extraordinary General Meeting (EGM) via Video Conference (VC).
14. The Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 have been introduced, permitting Indian Public companies to list their equity shares on international stock exchanges at GIFT IFSC.

Report of the Committee to Review Offences under the Companies Act, 2013

• Evaluate compoundable offences under the Act and consider if any of these can be decriminalised, thus holding the offending party accountable for a penalty instead of imprisonment.
• Investigate if any non-compoundable offences under the Act can be reclassified as compoundable offences.
• Propose enhancements to the current system of imposing penalties.

The main recommendations of the Committee to Review Offences

• Re-categorisation of 16 out of 81 compoundable offences into an in-house adjudication framework, where defaults would incur penalties from an adjudication officer.
• Establishing a clear and technology-based in-house adjudication system and enhancing transparency by reducing physical interactions, holding proceedings online, and making orders available on the website.
• Reinforcing the system by requiring a corresponding order to rectify the default when imposing a penalty, aiming to improve compliance overall.
• Alleviating the NCLT’s workload by expanding the Regional Director’s (RD) jurisdiction, granting the Central Government the authority to approve changes in a company’s financial year, and empowering the Central Government to authorise the conversion of public companies into private ones.

Report of the Company Law Committee

The Committee has focused its attention on the decriminalisation of compoundable offences as outlined in the 2013 Act, alongside some urgently required structural changes and specific modifications to the compliance and governance framework.

In three key areas, this Committee’s method for evaluating offences under the 2013 Act has progressed from the approach taken by the Review Committee. Firstly, to enhance overall compliance, the Committee considered alternative mechanisms or frameworks instead of simply enforcing criminal or civil liability. Secondly, the Committee examined the rationale for upholding criminal culpability in cases where detailed adjudication is not necessary. Lastly, the Committee assessed the severity of penalties and sought to rationalise them based on the nature and seriousness of the default.

The main recommendations of the Company Law Committee in the report are as follows:

• The reclassification of 23 out of 66 offences that fall under the category of compoundable offences into an internal adjudication system, where defaults will incur penalties imposed by an adjudicating officer.
• This includes excluding 7 compoundable offences, restricting 11 compoundable offences to fines only (thus eliminating the possibility of imprisonment), and suggesting that 5 offences be handled through a different framework (which may involve the use of contempt powers by the National Company Law Tribunal).

Conclusion

India’s choice to decriminalise corporate offences marks a significant move towards updating its corporate governance structure. To guarantee the enduring success of these reforms, ongoing monitoring and evaluation are essential. Enhancing Information and Analytics Management (IAM) via training initiatives and consistent reviews of offences and penalties will lead to greater efficiency. Policymakers ought to collaborate with business and legal experts to modify legislation in response to evolving markets. By fostering collaboration, India can establish a vibrant governance framework that encourages sustainable growth.

Reference(S):

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