No escape from RERA by structuring sale through lease

 

Agreement to lease Promoter includes Lessor Bombay High Court Order

Real Estate developers have been trying to avoid the applicability of Real Estate Regulatory Act (RERA) on their projects and transaction. One of the more common practice followed by real estate developers is to structure the agreement of sale transaction in the form of agreement of lease with perpetual right to the Lessee and his/her successors, right to transfer the lease etc.

The Developers have loudly contended that the term Promoter and allottee as defined under RERA do not include a Lessor and a Lessee and therefore the lease transactions are outside the purview of jurisdiction of Real Estate Regulatory Authority.

The aforesaid preposition has been challenged before the Maharashtra Real Estate Regulatory Appellate Authority and Bombay High Court. The Bombay high court has confirmed applicability of RERA on sale via agreement to lease.

Below are the prominent takeaways from the Bombay High Court Order:

(i) The nomenclature of the document cannot be true test of the real intent and document has to be read as a whole to ascertain the intention of the parties;

(ii) the definition of ‘Allottee’ also includes the ‘Lease Agreement’, though it may not include such Agreement, when the apartment is in its real sense given purely on rent and it is, in reality, an ‘Agreement of Rent and Lease’ and not, in effect, a transaction of sale;

(iii) The object of the RERA, is to regulate the real estate industry, to ensure greater accountability towards consumers and significantly to reduce frauds and delays, to bring into it the standardization, professionalism and the transparency, so that interests of the consumers are protected;

(iv) If the allotment of a plot, apartment or building, as the case may be, can be whether as a freehold or as leasehold, then the word ‘selling’ used in the definitions of ‘Promoter’ and ‘Real Estate Project’ also includes the allotment of a plot by lease. Merely because the Legislature has excluded the allotment, when it is given on rent, it does not exclude the long term lease.

Breaking Down ‘Prabhat Steel Traders Pvt. Ltd v Excel Metal Processors Pvt. Ltd’

 

“A person having vital interest in the subject matter of arbitration agreement cannot be asked to watch proceedings from the fence and leave the arena for the parties to the arbitration agreement to cut swords, when the victim of the outcome of the dispute is none else but the person pushed to the fence.”

Facts Briefly

  • The petitioner had purchased 46 HR steel coils.
  • The petitioner entered into a Conducting Agreement with the respondent no. 3 (Respondent no. 1 is the parent company of the respondent no. 3) whereby the petitioner gave the said coils to the respondent no. 3 for storing, handling and recoiling on job work basis.
  • In all of the said petitions, acknowledgements had been issued by the respondent no. 3 acknowledging the delivery and receipt of the respective coils from the petitioner.
  • It was the case of the petitioner that the petitioner visited the said warehouse to take delivery of the said coils from the respondent no. 3 and noticed that some of the coils including the said coils of the petitioner were marked as “SIPL” in yellow paint.
  • At that point of time, the offices of respondent no. 1 and respondent no. 3 informed the petitioner about some arbitration proceedings pending between respondent no. 1 and respondent no. 2 and that the coils which were purportedly claimed by the respondent no. 2 and have been attached/injuncted pursuant to an order dated 27th December, 2016 passed by the learned arbitrator.

Relief Prayed By The Petitioners

The High Court decided batch of 13 Petitions wherein the petitioners prayed for leave to appeal against the order passed by the arbitrator under section 17 of the Act and also prayed for setting aside the said impugned order granting interim measures against respondent no. 1 and in favor of the respondent no. 2 which was causing prejudice to the interest of the petitioners.

Per the Bombay High Court

  • Legislative Intent

Section 34 of the Arbitration and Conciliation Act, 1996 also refers to the expression “party” which is absent in section 37 of the Arbitration Act. The fact that the expression “party” is absent in section 37 of the Arbitration Act makes the legislative intent clear that the said expression “party” is deliberately not inserted so as to provide a remedy of an appeal to a third party who is affected by any interim measures granted by the arbitral tribunal or by the Court in the proceedings filed by and between the parties to the arbitration agreement.

  • Section 9 Akin to Section 17

Powers of Court under section 9 to grant interim measures and powers of the arbitral tribunal under section 17 of the Arbitration Act are identical in view of the amendment to section 17 with effect from 23rd October 2015, therefore, in the view of the Court, even a third party who is directly or indirectly affected by interim measures granted by the arbitral tribunal will have a remedy of an appeal under section 37 of the Arbitration Act.

  • Non Parties to Agreement may be Party to subsequent Proceedings

Since the order passed by the learned arbitrator for interim measures at the behest of one of the parties to the arbitration agreement which would prejudice the right, title and interest of a third party, such third party who is not allowed to seek impleadment in the arbitration proceedings or to apply for modification and/or vacating the order of interim reliefs, will have a right of appeal under section 37 of the Arbitration & Conciliation Act, 1996 against such order

Legislative Control of Online Pharmacies

Dipak Rao


21/9/2018  

 

Newspapers and the Electronic Media carry daily advertisements of online pharmacies inducing the reader to purchase medicines by uploading the doctor’s prescriptions. While this certainly saves time, most users of these online pharmacies may be mindful of the genuineness, storage conditions, and source of the medicines so dispensed.

Presently, these online pharmacies or e-pharmacy portals operate on the marketplace or inventory model in compliance with The Information Technology Act, 2000 and the e-commerce guidelines of the Government of India, with registered pharmacies or chemists as channel partners of these portals and the source of the medicines.

While the brick and mortar “Chemist” as we generally refer to these shops, are regulated by The Drugs and Cosmetics Act, 1940 and the Rules framed thereunder (the “Act”), the Act does not explicitly regulate the online pharmacies. The Government of India has by Notification dated August 28, 2018 proposed the Draft Drugs and Cosmetics Amendment Rules, 2018 (Draft Rules) to include provisions for regulation of the online pharmacies/e-pharmacies, by including a new Part VIB in the extant Drugs and Cosmetics Rules, 1945.

A brick and mortar Chemist is required to have a drug license issued by the Licensing Authority, for dispensation of drugs with the mandatory requirement of a Registered Pharmacist who is a person registered under the Pharmacy Act, 1948, or a matriculate or equivalent with four years’ experience of selling drugs, or a degree holder form a recognized University who has one year’s experience of dealing in drugs. The need of a Registered Pharmacist arises only when the Chemist is a pharmacy engaged in compounding medicines against a prescription. The Draft Rules purport to impose similar conditions on the E-pharmacies.

Under the Draft Rules, an E-pharmacy means the business of distribution or sale, stock, exhibit or offer for sale of drugs through web portal or any other electronic mode. E-pharmacy portal is defined as a web or electronic portal established and maintained by the E-pharmacy registration holder to conduct the business of e-pharmacy.

The E-pharmacy portal is to be established in India and the data generated or mirrored through the portal is prohibited from being sent or stored by any means outside India.

Every person who intends to operate the E-pharmacy, including an individual, HUF, Company, Partnership, LLP is required to apply for registration with the Licensing Authority to sell, stock, exhibit, or offer for sale drugs through E-pharmacy. The conditions for registration are:

  1. Compliance with the provisions of The Information Technology Act,2000.
  2. Cash or credit memo to be generated through the portal and should reflect:
  3. serial number and date,
  4. the name, address and sale license number of the licensee dispensing the drugs,
  5. the name, quantity, batch no., date of expiry and name of manufacturer of the drug dispensed.
  6. name and address of the e-pharmacy registration holder along with signature/digital signature of the Registered Pharmacist Incharge.

The registration would be for a period of three years, renewable within three months of expiry.

The E-pharmacy is prohibited from dealing with narcotic and psychotropic drugs referred to in the Narcotic Drugs and Psychotropic Substances Act, 1985, Tranquilizers and Drugs specified in Schedule 10 of the Drugs & Cosmetics Rules, 1945.

The obligations of the E-pharmacy registration holder for operating the E-pharmacy portal are:

  1. Orders for retail sale received through e-pharmacy portal.
  2. Dispensation of drugs against prescription of a registered medical practitioner received from the customer through the portal.
  3. Details of drugs dispensed including patient details to be maintained on the portal.
  4. Portal to disclose:
  5. registration certificate.
  6. constitution of the registration holder.
  7. logo, if any, of the portal.
  8. types of drugs offered for sale and availability.
  9. supply channels or vendor lists.
  10. details of registered medical practitioner, if any.
  11. name and registration details of Registered Pharmacist who validates the prescription before dispensing the drugs.
  12. details of the logistic service provider.
  13. return policy of dispensed drugs.
  14. Contact details of the E-pharmacy – email, landline and mobile numbers, address.
  15. Procedure for submitting grievances on the portal and redressal mechanism
  16. Facility for customer support and grievances redressal available for at least 12 hours every day for all 7 days of the week.
  17. Details of the patient to be kept confidential and not disclosed to any other person except the Central or State Government.

The Registered Pharmacist is under an obligation to verify the details of the patients, registered medical practitioner issuing the prescription and then to arrange to dispense the drugs in accordance with the prescriptions.

The E-pharmacy registration holder who has received the prescription on the portal shall dispense and make arrangements for supply of drugs from any retail or wholesale licensed premises under the Drugs & Cosmetics Act, 1940.

The Licensing Authority shall have powers to monitor the information on the E-pharmacy portal periodically as well as physically inspect every two years, the premises from where the E-pharmacy business is being conducted.

The Draft Rules have given the public a forty five days window for objections/suggestions which would be considered by the Central Government, after which the same would be re-notified in the Official Gazette and become effective.

KEY CONSIDERATIONS IN FOUNDERS’AGREEMENT

 

A founders’ agreement (“Agreement”) is contract that is executed between all the co-founders of a company. The Agreement sets forth the ownership, rights, responsibilities, dispute resolution and other terms to be executed between the founders and the company.

Key Terms of the Agreement

  1.  Equity ownership

One of the most important terms of the Agreement is determining the proportion of equity ownership of each of the co-founders of the company. The equity ownership of the co-founders of the company is determined taking into consideration multiple factors such as the monetary investment, experience, existing intellectual property, know-how and network in the industry. Also, the equity ownership is pertinent to ascertain the voting rights that the co-founder may exercise.

Significant Questions:

How much money is being invested and at what stage in the life cycle of the company? Is the founder also bringing other intangibles along with the money, such as experience, industry connects and credibility?

  1. Vesting

One of the important considerations to be taken note of while drafting the Agreement is providing a mechanism to deal with a situation where any of the co-founders exits or is ousted from the company. For this purpose, a vesting structure shall be incorporated in the Agreement detailing the manner in which the shares shall be taken up by the founders.

The vesting of the shares may done in the following manner:

  • Time Based Vesting

Under time based vesting, the shares owned by the founder shall be vested in proportion to the time spent by the founder in the company. In the event, the founder decides to quit from the company before the expiry of his term, the remaining shares of such founder shall be returned to the company. The Agreement shall state a time period post which the vesting of shares shall begin, say, 6 (six) months or 1 (one) year (“Cliff Period”). One potential problem with the time-based method of vesting is that performance of the founder is not taken into consideration.

  • Milestone Vesting

 The vesting of shares in milestone vesting takes place when the milestones set out in the Agreement are achieved by the company. This type of vesting rewards performance of the business as a whole. In the event, the founder leaves the company before the milestones are achieved, the shares earmarked for such founder does not vest in him.

Significant Questions:

Whether the vesting of the shares shall be time based or milestones based? What happens if one of the co-founders decides to leave before the expiry of the term of the Agreement?

  1. Demarcation of the roles and responsibilities

The Agreement should clearly demarcate the roles and responsibilities of each of the co-founders of the company. Broadly, the roles and responsibilities of the co-founders can be divided as operations, marketing, administration and finance.

Significant Questions:

What are the different roles and responsibilities that each of the co-founders will perform? How will be the accountability fixed?

  1. Restriction on transfer of shares

 Another important aspect to be taken into consideration in the Agreement is the rights and restrictions of the founders to transfer their shares in the company. The Agreement may provide for a lock-in clause prescribing the number of years before the expiry of which the co-founder is not permitted to transfer the shares owned by him in the company. The Agreement shall provide for a mechanism to deal with a situation where the co-founder wants to exit the company before the expiry of the lock-in-period. It is pertinent to ascertain the method of valuation of the shares and the anti-dilution rights attached to the shares.

One of the ways to ensure that the equity of the company is not transferred to outsiders is by providing the right of first refusal to the shareholders. The right of first refusal will require the founders to transfer their shares to outsiders only once the same has been refused to be taken up by the other shareholders of the company.

The High Court of Judicature at Bombay in Bajaj Auto Ltd v. Western Maharashtra Development Corporation Limited (CDJ2015 BHC 1305) held that in the event there is an agreement inter se the shareholders containing restrictions on transfer of shares of the company, then even if such a company is a public company the restrictions on transfer of shares will be enforceable.

Significant Questions:

What kind of restriction on transfer of shares may be imposed by the company? What shall be the lock-in period of the shares?

  1. Intellectual property assignment

In general business practice, the ideas, inventions and other intellectual property developed by a person remains the property of that person. While drafting the Agreement it must be taken care that the intellectual property rights of the co-founders are assigned to the company and the same do not remain the property of an individual. It is not uncommon for companies to obtain trademarks, patents and domain names in the name of one or more of the co-founders initially which later may be transferred in the name of the company. The valuation of the company is affected by the intellectual property owned by it. Further, the Agreement shall contain a clause stating that the intellectual property developed by the co-founders in the course of their association with the company shall always be owned by the company. In specialized high technology sectors, the founder can consider sharing the intellectual property jointly with the company. However, this needs to be well thought out and documented properly.

Significant Questions:

Whether the intellectual property developed by the founder shall be fully transferred to the company or shall it be shared between the company and the founder? How will the valuation of the intellectual property to be transferred done?

  1. Value additions by the founders

The co-founders may make value additions in the form of bringing in intellectual property rights, technical know-how, marketing rights or similar value additions in the company. It is important that there is a clear understanding between the co-founders with respect to the nature of such value additions, the monetary value of such value additions, time periods at which such value additions would be made and the compensation to be paid to the co-founders for bringing in such value additions. At times, the co-founders are issued shares against the value additions made by them. The Agreement should clearly lay down the number of shares to be issued, percentage shareholding and the method of valuation of such shares, so that there is no ambiguity pertaining to the same.

Significant Questions:

How many shares are to be issued against the value additions? How shall the value of the shares be determined?

  1. Non-compete

The co-founders of the company are expected to maintain strict confidentiality of the business activities of the company and shall refrain from engaging in any business that conflicts with the business of the company. There should be a clear agreement between the co-founders prohibiting them from engaging in activities that are in conflict with the objectives of the company during their association and for a period of a certain number of years after the termination of the Agreement.

It is pertinent to note that section 27 of the Indian Contract Act, 1872 (Contract Act) provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. The courts in India have taken varied views in enforcing such a clause. It can be inferred that while dealing with disputes relating to non-compete clause under an employment agreement, the Indian courts have considered the pre-termination period of the employment distinct from the post termination period of the employment. Whilst the courts have been tolerant about the application of the non-compete clause, they have walked an extra mile to ensure that such a clause does not have an effect after the cessation of employment and have held that such a clause would fall within the mischief of section 27 of the Contract Act.

In Taprogge Gesellschaft MBH v. IAEC India Ltd (AIR 1988 Bom 157), the Bombay High Court held that a restraint operating after termination of the contract to secure freedom from competition from a person, who no longer worked within the contract, was void. The court refused to enforce the negative covenant and held that, even if such a covenant was valid under German law, it could not be enforced in India.

In Gujarat Bottling Company Ltd and Ors. v. Coca Cola Co. and Ors. [1995 (5) SCC 545 it has been held that “There is a growing trend to regulate the distribution of goods and services through franchise agreements providing for the grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.”.

Significant Questions:

What constitutes a competing business? What shall be the period of non-compete so that it is not considered as unreasonable?

  1. Confidentiality

The founders by the very nature of their association with the company have knowledge of a lot of confidential information about the company some of which may constitute trade secrets. The founders should be contractually restricted from disclosing any confidential information obtained by such co-founder during the course of his/her association with the company as the same may cause irreparable harm to the business of the company.

Significant Questions:

Whether the company shall sign a separate non-disclosure agreement with the founders? What constitutes the confidential information of the company? What shall be the duration for which the confidentiality obligations will subsist post the expiry of the Agreement?

In Fairfest Media Ltd. v. ITE Group PLC (2015 (2) CHN 704), the Petitioner, an organizer of travel trade shows entered into a non-disclosure agreement with the respondent for a period of 6 (six) months in anticipation of entering into a joint venture agreement with the respondent on a later date. As per the terms of the non-disclosure agreement, the respondent was restrained from disclosing the confidential information for a period of 2 (two) years from the date of the termination of the non-disclosure agreement. The nature of information for which the petitioner was seeking protection related to marketing strategy, customer base, costing and profitability of organizing travel trade shows. Subsequently, when the parties failed to conclude the negotiations, the petitioner prayed for an order of injunction from the court to prevent the respondent from utilizing the confidential information for a period of 2 (two) years from the date of termination of the non-disclosure agreement. The High Court of Kolkata held that business information such as cost and pricing, projected capital investments, inventory, marketing strategies and customer lists may qualify as trade secrets and passed an order of injunction restraining the respondent from sharing any information concerning the marketing strategy and customer base received from the petitioner for a period of 2 (two) years from the date of termination of the non-disclosure agreement thereby enforcing the non-disclosure agreement post termination. In enforcing the non-disclosure agreement post termination, the court also relied on the principle that a person who has obtained confidential information cannot use it as a springboard for activities detrimental to the person who has made the confidential information. Further, in determining what shall constitute confidential information the court relied on the rule laid down in an English case Saltmen Engineering Co. v. Campbell Engineering Co. Ltd. [1963 (3) All ER 413] which states that an information can only be said to be confidential information when it has been made by the maker who has applied his brain and produced a result which cannot be produced by another without going through the same process.

  1. Employment

Generally, the co-founders are required to be in whole time employment of the company. There must be a clear understanding amongst the co-founders with respect to their terms of employment, designation, compensation and benefits to be paid to each of them. The Agreement may contain general understanding between the co-founders pertaining to the same and a separate employment contract shall be entered into providing the detailed terms of employment of the co-founders including the benefits to be provided to each of the co-founders. The employment contract of the co-founder shall contain a non-compete clause that prohibits the co-founder to solicit clients or employees of the company to other entities post his departure from the company.

Significant Questions:

What shall be the designation, roles and responsibilities of the founder? How much compensation and other benefits shall be provided to the founder? What shall be the mechanism for termination of the employment contract?

  1. Future financing

The Agreement should clearly contain the detailed provisions for contribution of additional finances by the co-founders for the growth of the company, i.e., whether the additional finances shall be contributed by the founders as equity or as debt, the method of valuation of equity in case the financing is through equity and the rate of interest to be paid by the company in case the financing is a debt financing.

Significant Questions:

Whether the additional finances shall be contributed by the founders as equity or as debt? What shall be the method of valuation of equity in case the financing is done through equity and the rate of interest to be paid by the company in case the financing is a debt financing?

  1. Decision making

In the day-to-day functioning of the business, the company may be required to take complex decisions. The Agreement shall clearly state the manner of exercise of simple as well as the substantial decisions. Further, the structure of the board of directors of the company shall be determined. The day-to-day decision making is allocated to the chief executive officer who is appointed by the board of directors of the company. The Agreement is also required to prescribe the procedure which is to be adopted by the company in the event that there is a deadlock in decision making.

Significant Questions:

What shall be structure of the board of directors? How will the simple and complex decisions be made? What will be the mechanism adopted in case there is a deadlock in decision making?

  1. Termination and dispute resolution

The Agreement shall lay down the rights of the company as well the co-founders to terminate the Agreement. The Agreement may be terminated upon occurrence of a particular event, i.e., for cause or without any cause by a party or by mutual consent of the parties. Further, the Agreement shall provide a clear mechanism for resolution of disputes between the company and the co-founders with respect to any matter stated in the Agreement, i.e., mediation, conciliation and arbitration. The parties shall agree on the governing law of the Agreement and the exclusive jurisdiction of the courts to which the disputes under the Agreement may be referred to.

Significant Questions:

Under what circumstances shall the Agreement be terminated? How will the dispute between the parties be resolved? Which court shall have the exclusive jurisdiction to try any dispute arising n connection with the Agreement.

The terms of an arbitration agreement cannot be superseded by oral agreement

The Delhi High Court in its recent judgment has reemphasized the supremacy of a written arbitration agreement and the terms contained therein, over any other understanding the parties may come to, orally.

Justice Prathiba M. Singh while dealing with a challenge under section 34(2) of the Arbitration and Conciliation Act, 1996 set aside the award passed by a three-member Tribunal on the ground that the Tribunal was not constituted in consonance with the Arbitration Agreement.

Facts Briefly:

Mother Boon Foods Pvt. Ltd. (Petitioner) was appointed as a contract-manufacturer -for manufacturing and packaging breads- by Mindscape One Marketing Pvt. Ltd. (Respondent), a leading company engaged in the manufacturing and marketing of bread.

A contract was signed to effectuate the aforesaid agreement and subsequently the Petitioner commenced production. Over time, disputes between the parties arose which led to termination of the said agreement. Thereafter the petitioner raised certain claims which were rejected by the Respondent, leading to the invocation of the arbitration agreement.

In furtherance of the invocation, the Respondent constituted a three-member tribunal as opposed to appointing a sole arbitrator as stipulated in the arbitration agreement.

The Petitioner objected to the constitution of the arbitral tribunal and preferred not to participate in the arbitration proceedings.

The Petitioner pleaded violation of the arbitration agreement by the Respondent and challenged the Arbitral Award passed by the Tribunal before the High Court, on the ground that the constitution of three-member tribunal was not in accordance with the agreement.

However it was the Respondent’s case that the three member tribunal was in fact constituted at the instance of the Petitioner, who demanded for a three-member tribunal since it would help meet the ends of fairness. Accordingly, the three member tribunal was constituted to give a fairer adjudication process for the Petitioner.

The Verdict:

The High Court opined that the arbitration agreement in the given case was in the form of an arbitration clause -which was in writing-  in line with the mandate of section 7, given under the Arbitration and Conciliation Act of 1996 (hereinafter “the Act”) . Therefore the same could not have been superseded by any oral demand or agreement.

In view of the Court, if a three member tribunal had to be appointed, then the same ought to have been done with the consent of the Petitioner and in accordance with the provisions of the Act. There was, however, nothing on record to show that the Petitioner indeed demanded for constitution of a three member tribunal. The arbitration agreement, as per the 1996 Act, has to be in writing and since the arbitration clause, which is a part of the contract, was in writing, the same could not have been superseded by any oral demand or agreement.

Furthermore, the Petitioner may have been clever in orally demanding a three member tribunal but clearly, the procedure adopted by the Respondent was impermissible. The Petitioner having raised its objection at the initial stage itself to the constitution of the tribunal but the tribunal having proceeded further with the matter, the Petitioner is entitled to challenge the said constitution at this stage by raising its objections under Section 34. A reliance was also placed on the judgment in the matter of Prime Industries Ltd. v. SEIL Ltd., 2010 LawSuit (Del) 996 which holds that the will of the parties, as reflected in the agreement, has to prevail.

COMPOUNDABLE OFFENCES UNDER THE COMPANIES ACT, 2013

Non-compliance with the provisions of the Companies Act, 2013 (“Act”) will entail penalties and/or imprisonment as specified under the Act. Further, offences under the Act have been classified as Compoundable and Non-compoundable offence. Compounding of offence is a process whereby the person/entity committing default will file an application to the compounding authority accepting that it has committed an offence and so that same should be condoned. The compounding authority may compound the offence and ask the defaulting party to deposit compounding fee as decided by it on case to case basis. Once the said compounding fee is paid, the defaulting will no more be treated in default of the offence which has been so compounded.

The provisions pertaining to compounding of offences under the Act are set forth under Section 441 of Act. Section 441 of the Act provides for compounding of following offences:

  1. Offence punishable with fine only, or
  2. Offence punishable with fine or imprisonment or both.

The following offences cannot be compounded under the Act:

  1. Offence punishable with imprisonment only.
  2. Offence punishable with both imprisonment and fine.

Who are compounding authorities under the Act?

Under the Act, the compounding authority shall be either Regional Director or National Company Law Tribunal. An offence shall be compounded by Regional Director where the maximum amount of fine which may be imposed for such offence does not exceed INR 5,00,000. All offences where the maximum amount of fine which may be imposed for such offence exceed INR 5,00,000 shall be compounded by National Company Law Tribunal.

Examples of offences compoundable under the Act

  • Section 56 (6) – non-compliance relating to transfer and transmission of securities;
  • Section 64(2) – failure notice to be given to registrar for alteration of share capital;
  • Section 99 – default in holding of Annual General Meeting;
  • Section 102(5) – not annexing explanatory statement to notice;
  • Section 117(2) – failure in filing of resolutions and agreements with the Registrar of Companies;
  • Section 203(5) – Failure to appoint Key Managerial Personnel.

Recent Developments

In order to boost ease of doing business in India and to reduce the pendency of cases filed with courts, the Ministry of Corporate Affairs has formed an expert panel to provide a report with regard to simplification of imposition of penalties for minor violations under the Act including certain penalties related to technical defaults and corporate governance. The panel has recommended that 16 technical defaults and corporate governance offences be moved out of the ambit of courts. The panel has proposed that only fine should be levied in 12 offences and for other 4, either fine or imprisonment or both could be levied. The panel also propose to make revisions in penalties imposed on serious offences.

Where a company or its officer(s) become aware of some default under the Companies Act, 2013 it would always be advisable to avail the benefit of compounding provisions under the Act so that the company remains fully compliant with the provisions of the Act.