Adjudication of Penalties

MCA has vide its notification dated 19th February, 2019 amended the Rule 3 of Companies (Adjudication of Penalties), Rules, 2014. This rule has emanated from section 454 of the Companies Act, 2013 

Section 454 gives powers to the central government to impose penalties on the companies and officers in default for any non compliance of the Act or Rules. 

The salient feature of the new Rule 3 is as follows:

1) central government can appoint officers not below the rank of Registrar as adjudicating officers to adjudge the penalties under the Act;
2) Before adjudging penalty, notice is required to be given to the company/ officer in default;
3) Time period to be given for reply - not less than 15 days and not more than 30 days;
4) Notice to clearly indicate the nature of non compliance, pointing out the relevant penal provisions and the maximum penalty which can be levied;
5) Reply to the notice to be filed in electronic mode only within the time prescribed;
6) Period for reply can be extended by another 15 days for sufficient reasons given;
7) On receipt of reply, if the adjudicating officer feels that physical presence is required, then he shall issue a notice within 10 days of receiving the reply and fix a date for making physical appearance;
8) Physical appearance can be made personally or through authorised representative;
9) If the person has, in his reply, indicated that he would like to make oral representation, then the adjudicating officer shall given him time accordingly;
 10) On the hearing date, the party shall be given a reasonable opportunity of being heard and thereafter the AO shall pass an order recording the reasons in writing;
11) The order shall also be for adjournment of the hearing to another date;
12) The AO may also require the person concerned to submit his reply to certain matters relevant to ascertain the default;
13) The AO shall pass an order within 30 days of the reply received from the person, where no physical appearance is required. Where physical appearance was done, then the period is 90 days from the date of the notice;
14) Every order shall be duly dated and signed and shall clearly state the reasons why physical appearance was required;
15) Copy of the order shall be sent to the company, officer in default, central government and uploaded on the website of the ministry;
16) The AO shall have powers to summon and enforce attendance of any person acquainted with the facts and circumstance of the case;
17) The AO shall also have the powers to order evidence or produce any document which he feels could be relevant to the case;
18) If any person fails or neglects to reply or refuses to appear before the AO, the AO can pass an order imposing a penalty on the said person after recording his reasons in writing;
19) While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-

(a) size of the company;

(b) nature of business carried on by the company;

(c) injury to public interest;

(d) nature of the default;

(e) repetition of the default;

(f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and

(g) the amount of loss caused to an investor or group of investors or creditors as a result of the default:

20) Penalty can never be less than the minimum penalty imposed under the relevant section of the Act;

21) In case a fixed sum has been prescribed as penalty under the Act, then the AO will impose that fixed sum as a penalty 

22) Penalty has to be paid through the MCA portal;

MCA e-form ACTIVE

MCA has vide notification dated 21st February, 2019 amended the Companies Incorporation Rules by introducing a new e-form ACTIVE (INC-22A). 

Salient features are 

1) this amendment shall come into force from 25th February, 2019;

2) all companies incorporated before 31st December, 2017 are required to file this form;

3) particulars of the company and its registered office is captured in this form;

4) companies which have not filed its financials (AOC-4) or annual return (MGT-7) or both are restricted from filing this form unless it is under management dispute and ROC has recorded the same;

5)  companies which have been struck off or under process of strike off or under liquidation or amalgamation or dissolution are exempt from filing this e-form;

6) last date for filing is 25th April, 2019 - there is no fees upto 25th April after that it will be Rs.10,000 per form;

7) if the filing is not done by the said date, then it shall be marked as "ACTIVE non compliant" in the MCA portal and shall be liable to action u/s 12(9) of the Companies Act, 2013;

8) if the company is ACTIVE non compliant after the said date, then the following event based forms will not be allowed to be filed by the company -

SH-7 change in authorised share capital

PAS-3 - change in paid up share capital

DIR-12 - change in Directors, except cessation 

INC-22 - change in registered office

INC-28 - amalgamation, de-merger etc. 

9) if the company files the form after 26th April, 2019 then it shall be required to pay a fee of Rs.10,000/-. Only then the company will be marked as ACTIVE COMPLIANT;

10) new form INC-22A has been introduced;

11) form requires details of the company name, registered office address, e-mail id, no. of directors, list of directors, details of statutory auditors, cost auditors, if any, details of MD, CEO, WTD, company secretary, CFO & challan nos. of e-forms AOC-4 & MGT-7 for FY 2017-18.
12) geo tagging of the registered office required so latitude and longitude to be given;

13) e-mail id is with OTP, so there will be a validation process 

14) in the attachment, mandatory attachment is a photograph of the registered office, showing the external building, inside office and also showing at least one Director/ KMP who has affixed his DSC to the form. The photograph of the exterior of the office should show the name plate of the company with CIN and GSTIN
15) further, the DSC of at least two Directors is required to be affixed in the form. 

filing of resolutions

MCA has amended section 117(2) of the Companies Act, 2013 vide Companies Ordinance 2019 which has been gazetted on 12th January, 2019.

The amended section 117(2) reads as follows:

"(2) If any company fails to file the resolution or agreement under sub-section (1) before the expiry of the period specified therein, such company shall be liable to a penalty of Rs.100,000 and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues subject to a maximum of Rs.25 lakhs and every officer of the company including the liquidator of the company, if any, shall be liable to a penalty of Rs.50,000/- and in case of continuing failure, with a further penalty of Rs.500 for each day after the first during which such failure continues subject to a maximum of Rs.5 lakhs."

What has changed is that earlier the phrase was "shall be punishable with fine", now it is replaced with "shall be liable to penalty". There must be some implications for this change.

Earlier the penalty on the company was ranging from Rs.1 lakh to Rs.25 lakhs, now it is fixed as Rs.100,000/-. The provision of continuing failure penalty has been brought in, which was not there earlier.

Similarly, the penalty for the officer in default was ranging from Rs.50,000/- to Rs.5 lakhs, but now it has been fixed at Rs.50,000/- and here also the continuing failure provision has been introduced.

Section 117 pertains to filing of special resolutions and agreements which is required for key important matters such as special resolutions passed in general meetings, Board resolution for appointment, re-appointment, or renewal of appointment or variation in terms of appointment of managing director. Resolution which requires the company to be would up voluntarily and resolutions passed in pursuance to section 179(3) - these are Board resolutions for important items such as borrowings, buy-back, issue of securities, making calls on shareholders, investment, grant loans or give guarantee or provide security in respect of loans, approve financial statement & Board report, diversify the business, amalgamation, merger, reconstruction, take over etc.

These resolutions are filed in form MGT-14 and the normal time for filing the same is 30 days from the date of passing the resolutions.  

annual return

MCA has vide the Companies Ordinance 2019 which has been gazetted on 12th January, 2019 amended section 92 as follows:

Section 92 pertains to annual return to be filed by every company in India. This is one of the two mandatory annual filings to be done by every company in India. It is required to be filed within 60 days from the date of the annual general meeting or where no AGM is held, within 60 days from the last date on which AGM should have been held. It contains details of the Directors, shareholders, debt, managerial remuneration, share transfers, board meetings, general meetings, etc.

Section 92(5) is the penalty section, which has been modified. The amended section 92(5) states as follows:

"If a company fails to file its annual return under sub-section (4) before the expiry of the period specified therein, such company and its every officer who is in default shall be liable to penalty of Rs.50,000/- and in case of continuing failure, with a further penalty of Rs.100 per day during which the failure continues, subject to maximum of Rs.500,000/-."

What has changed is that earlier the company was subject to a penalty of not less than Rs.50,000/- but which may extend to Rs.500,000/- and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 6 months OR fine of Rs.50,000/- which may extend to Rs.5000,000/- or with both.

So the imprisonment has been removed and penalty for both the company and officer in default has been made common i.e. Rs.50,000/-. Penalty for continuing failure has been added, which was not there hitherto.

appointment of KMP

Section 203(5) of the Companies Act, 2013 has been amended vide Companies Ordinance, 2019 as follows:

Section 203(5) after amendment reads as follows:

"If any company makes a default in complying with the provisions of this section, such company shall be liable to a penalty of Rs.500,000 and every director and KMP of the company who is in default, shall be liable to a penalty of Rs.50,000 and where default is a continuing one, with a further penalty of Rs.1000/- per day after the first day, during which such default continues but not exceeding Rs.500,000/-.

The earlier section mentioned penalty of not less than Rs.100,000 on the company, but which may extend to Rs.500,000/- Now it is one figure of Rs.500,000/- All other provisions are the same except the wordings earlier was "shall be punishable with fine" has been replaced with  "shall be liable to penalty".

Unable to comprehend the meaning of this phrase change.

Section 203 pertains to appointment of managing director, CEO or manager, company secretary and chief financial officer in certain specified companies. The specifications are contained in Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 wherein it is stated that every listed company and every public company having paid up share capital of Rs.10 crore or more shall have whole-time key managerial personnel. It also applies to private company having paid up share capital of Rs.5 crores or more and they are required to appoint whole time company secretary.

Cartelisation - Dry Cell batteries market

The Competition Commission of India (‘CCI’) passed a Final Order imposing penalty on Panasonic Energy India Co. Limited (‘Panasonic’) and Godrej and Boyce Manufacturing Co. Limited (‘Godrej’) for colluding to fix prices of zinc-carbon dry cell batteries in India. In respect of Panasonic, CCI granted 100 percent reduction in penalty by invoking the provisions of Section 46 of the Competition Act, 2002 (‘the Act’) read with the Competition Commission of India (Lesser Penalty) Regulations, 2009 (‘Lesser Penalty Regulations’).  

The case was taken-up by CCI suo motu under the provisions of Section 19 of the Act based on the disclosure made by Panasonic under Section 46 of the Act read with the Lesser Penalty Regulations. From the evidence collected in the case, which included an anti-competitive clause in the written agreement entered into between Panasonic and Godrej for supply of batteries, and e-mail communications between the key managerial personnel of the two of them, CCI found existence of a bi-lateral ancillary cartel between Panasonic and Godrej in the market of institutional sales of dry cell batteries. It was found that Panasonic, which had a primary cartel with Eveready Industries India Ltd. and Indo National Limited as established in Suo Motu Case No. 01 of 2016 by CCI, having fore-knowledge about the time of price increase to be affected by this primary cartel, used such fore-knowledge as leverage to negotiate and increase the basic price of the batteries sold by it to Godrej. Further, Panasonic and Godrej, in accordance with the prices of the primary cartel, used to agree on the market price of the batteries being sold by them, so as to maintain price parity in the market.

Based on the above, CCI found that Panasonic and Godrej have indulged in the anti-competitive conduct of price co-ordination, in contravention of the provisions of Section 3 (3) (a) read with Section 3 (1) of the Act. It was observed that such conduct continued from 13.01.2012, when Panasonic and Godrej entered into a written agreement, till 30.11.2014, when Godrej terminated the said agreement.

Considering all the relevant factors, penalty on Panasonic was levied at the rate of 1.5 times of its profit for each year from January 2012 to November 2014 amounting to INR 31.76 crores, and on Godrej at the rate of 4 percent of its turnover for each year from January 2012 to November 2014 amounting to INR 85 lacs. Also, considering the totality of facts and circumstances of the case, penalty leviable on the individual officials of Panasonic and Godrej was computed at the rate of 10 percent of the average of their income for the preceding three years. As to Panasonic, to the officials of Panasonic also, 100 percent reduction in penalty was granted under the provisions of Section 46 of the Act read with the Lesser Penalty Regulations.

penalty on Chemists & Druggists

The Competition Commission of India (‘Commission’) has found the Chemists and Druggists Association of Baroda (‘CDAB’) to be in contravention of the provisions of the Competition Act, 2002 (‘Act’). A complaint/information was filed with the Monopolies and Restrictive Trade Practices Commission (MRTPC) in 2009 alleging that the CDAB has indulged in restrictive trade practices. The allegations were that the CDAB, through its practices, is limiting and controlling the supply of drugs and medicines in the market by mandating ‘No Objection Certificate’ (‘NOC’) prior to appointment of stockists and payment of ‘Product Information Service’ (‘PIS’) charges prior to introduction of new products in the market by pharmaceutical companies. Besides, there were allegations that CDAB was fixing the trade margins for the wholesalers/retailers. Subsequently, the case was transferred to the Commission by MRTPC under the provisions of Section 66(6) of the Act. The Commission after forming a prima-facie opinion directed the office of Director General (hereinafter, the ‘DG’) to conduct investigation into the matter. 

Investigation carried-out by the DG established contravention on part of the CDAB. After detailed enquiry, the Commission passed an order dated 05.09.2012 wherein it was found that the CDAB was imposing the requirement of mandatory NOC and was also fixing margins for the wholesalers and retailers by enforcing the norms laid down by AIOCD. The same was found to be in contravention of the provisions of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Act. Accordingly, the Commission imposed a monetary penalty, in addition to cease and desist directions, under Section 27 of the Act.

Pursuant to an appeal filed by CDAB, the erstwhile Hon’ble COMPAT, vide its order dated 18.11.2016, set aside the Commission’s order dated 05.09.2012 on a procedural issue and remanded the matter back to the Commission for fresh adjudication.

Accordingly, the matter was considered afresh. After allowing CDAB with an opportunity to cross-examine various witnesses, the Commission allowed parties to file their written submissions and conducted a detailed hearing in the matter. Based on the material available on record, the Commission found that the CDAB was indulging in the anti-competitive practice of insisting NOC prior to the appointment of new stockists by pharmaceutical companies and was also fixing/prescribing the trade margins during the relevant time period, in contravention of the provisions of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Act.

Accordingly, CDAB was directed to cease and desist from indulging in the aforesaid anti-competitive practice. Further, the Commission imposed a monetary penalty of Rs. 32,724/- calculated at the rate of 10% of the average relevant income of CDAB for the relevant period, under the provisions of Section 27 of the Act.

The detailed Order can be seen at the Commission’s website www.cci.gov.in.