This Act is more than just an act

It is not a secret that the proposed changes to the Companies Act, which were referred to a joint parliamentary committee, will prove to be huge steps in ‘ease of doing business.’ Corporate leaders, and board directors will be relieved as many actions are likely to be decriminalised. However, opposition politicians claim that they will undermine the powers of the law-makers, and hand over the responsibilities to the executive. Lawyers make a distinction between lapses that are deemed more severe than others. Despite the good intentions, there are indications that ideology has crept in the new laws.

For example, some of the acts of the corporate boards, which have a fiduciary and crucial role to play to protect the rights of the shareholders, will move from the criminal arena to civil one. Fines and penalties are lower than the earlier laws. Thus, some corporate lawyers feel that the so-called “bedrock of corporate governance,” or the actions and decisions of the corporate leaders and directors may not be questioned as rigorously as they need to be. Minor, or lower, fines may make them complacent, and compliance may take a hit.

This is crucial in the context of the recent decision by Atanu Chakraborty, who recently and shockingly resigned as the non-executive chairman of HDFC Bank for reasons related to “my values and ethics.” The stock bumped down by 10 per cent in four straight sessions before it perked up again. The issue apparently related to the mis-selling of a certain kind of bonds by the bank’s Dubai office. The bonds, which are structurally complex, and sold to sophisticated investors, were purchased by the retail clients. Dubai’s financial authority banned the operations in September 2025.

Days after the resignation, Sebi chairman, Tuhin Kanta Pandey, put the insidious incident in perspective. He reminded the corporate world that independent directors like Chakraborty need to protect the rights of the minority shareholders, and must act “responsibly.” Hence, “No one is expected to make insinuations without proper evidence and recordings,” the Sebi head added. He said that the market regulator would thoroughly investigate the aspects of the matter. There was a system to deal with the concerns of the independent directors. In effect, responsibility implies responsibility within the confines of the law.

Now, consider how the defaults related to holding an annual general meeting (AGM) will be treated under the new corporate laws. At present, the fine is INR 1,00,000 plus a continuing one of INR 15,000 a day. The new law states that this will remain intact, but the total will be capped at INR 2,00,000 if an AGM is not held. The open-ended liability, which depends on the time-period of the offence, will turn into a closed one. If an AGM is not held for 12 months, the payment will be INR 2,00,000, and not INR 1,00,000, plus INR 15,000 x 365, or INR 55,75,000.

One can look at the differences in the penalties for company-related legal issues, and welfare-related stakeholders ones. A breach in the directors’ responsibility statement, which is mandatory and relates to the affirmation that the directors kept proper records, and maintained accounting standards, will attract a fine of INR 3,00,000. An inability to spend the mandatory amount on corporate social responsibility (CSR) can attract an amount of up to INR 1,00,00,000. Thus, the first is seen as a technical oversight, and the latter as something that affects public interest, especially those of the poor and local communities.

Over the past few years, CSR has emerged as a controversial issue. Businesses complain that they are forced to invest in causes that they are not comfortable with. Management experts contend that CSR should focus on research and innovation, rather than welfare. Observers imply that the CSR money is either wasted, as family members of the promoters run the foundations, or even siphoned off to line the pockets of promoters-linked individuals. The Government, by insisting on high fines, feels it is a necessity in public interest.

Of course, the high penalty forms a part of other measures that seek to ease the difficulties in CSR spending. According to a media report, the net profit threshold for CSR will be doubled to INR 10 crore, and the time to transfer the unspent funds will be hiked by three times to 90 days. “The central government may exempt certain classes of companies from CSR obligations,” states the report. In comparison, it is just the maximum penalty that rises to INR 1,00,00,000. Some may contend that this is a case of good intentions mixed with ideology.

What is crucial is that there is a feeling that a failure to spend the mandatory CSR can be technical, and individual oversight, which can be corrected without major consequences. It may be related to clearances-related timing, i.e., a specific project or some projects were delayed due to external reasons, or internal procedures. In many cases, subsidiaries need to seek permissions from the parent firms. It can be linked to issues related with completion of the projects, which were delayed because of factors that were not in control. Heavy fines for such technicalities, compared to directors’ fiduciary duties, seem odd.

In the recent past, public interest, and protecting the rights of the common masses has reflected in legislation. The prime example is the ban on real-money online gaming, which was completely unexpected by the industry. Once the Supreme Court rulings made distinctions between games of chance and skill, and the Government imposed high taxes on online gaming, the businesses expected tighter rules. Instead, there was a ban because of the sufferings of the people, who lost their savings, or wasted emergency funds required for healthcare. Welfare of the people trumped the cause of the industry and businesses.

According to a media report, lawyers feel that the striking gap in the new proposed corporate laws relate to asset stripping by promoters, directors, senior management, and others. One of the prominent ways to do this is to shift the assets to other linked or non-linked entities without the permission of the shareholders of the company that originally held them. Since there is no specific penalty for such acts, the “general provision applies, levying a penalty of INR 10,000.” Over the years, asset-stripping has returned as major corporate fraud.

Thus, on an overall basis there is a definite case for the ease of doing business, and make the lives of the directors easier. At the same, there are some issues that the Government will impose.