NCLT Regime: Unlisted Companies Witness Stricter Liabilities

Bar & Bench January 11 2017

Apurva Kanvinde and Abhinav Surana

The Government’s attempt to replace the five decade old Companies Act, 1956 was accomplished in 2013 with the notification of the Companies Act, 2013 (“2013 Act”). The 2013 Act brought about sweeping changes in the Indian company law. It increased liabilities for directors and key managerial personnel, prescribed stricter norms for unlisted companies and introduced higher thresholds for corporate governance.

One of the major changes brought about by the 2013 Act was the increase in the regulations of the unlisted companies vis-à-vis compliance with corporate governance norms. Until the 2013 Act came into force only listed companies were under strict scrutiny of the capital markets regulator, the Securities and Exchange Board of India (“SEBI”). Unlisted companies, though regulated by the Registrar of Companies, were not subject to such strict scrutiny and was often used as conduit to avoid compliance with SEBI regulations. Unlisted companies were also used to raise money from the public without complying with the norms for listed companies. In order to curb and monitor such practices, the 2013 Act introduced stricter regulations on unlisted companies by prescribing higher thresholds of corporate governance.

The 2013 Act mandates appointment of an independent director on the board of every public companies (including public unlisted companies) having a paid up share capital of more than INR 10 crores or turnover of more than INR 100 crores or outstanding loans of more than INR 50 crores. Further every public companies (including public unlisted companies) with a paid up share capital of more than INR 100 crores or turnover of more than INR 300 crores is required to appoint a woman director on its board. The 2013 Act stipulates that in case of non-compliance with the aforesaid provisions the company and very officer shall be punishable with a fine of INR 50,000/- which may extend to INR 5,00,000/-.

Provisions in relation to appointment of directors under the 2013 Act were notified in April 2014 and were required to be complied with within a period of one year from its notification. However, it is only pursuant to the setting up of the National Company Law Tribunal (“NCLT”) and National Company Law Appellant Tribunal (“NCLAT”) in June 2016 that strict implementation of these provisions has been witnessed. The NCLT which was set up on 1st June 2016 to replace the existing Company Law Board, has its principal bench at New Delhi and other benches in Mumbai, Chandigarh, Hyderabad, Chennai etc. In a recent order of the Hyderabad Bench of the NCLT, a fine of INR 1,00,000/- (Indian Rupees One Lakh Only) and INR 50,000/- (Indian Rupees Fifty Thousand Only) was imposed on a Telangana based company, Teamasia Semiconductors (India) Limited (“TSIL”) and each of its directors respectively for a delay of 14 months in appointing the woman director. In the present case, the Registrar of Companies, Telangana (“ROC”) had issued a show cause notice to TSIL and its directors for failure to appoint a woman director. TSIL contended that it had not carried on any commercial operations from the year 2000 and the company’s entire share capital was fully eroded due to past losses. Further TSIL was proposing to go for winding up. The ROC not being satisfied with the contentions, filed a compliant before the Hon’ble Court of Special Judge for Economic Offences- cum- VIII AMSJ Court, Hyderabad. TSIL thereafter appointed a woman director in March 2016 and filed an application with the NCLT, Hyderabad Bench for compounding the offence. While taking the facts of the case into consideration, NCLT imposed the aforesaid fine and noted that it was taking a “lenient view”.

The 2013 Act seems to be a conscious effort on behalf of the legislature to enhance standards of corporate governance especially in high value unlisted companies. Its enactment is heavily influenced by instances of corporate frauds in India. The NCLT Hyderabad Bench has set an example by its strict implementation to dissuade non-compliance of the provisions of the 2013 Act in respect of corporate governance applicable to unlisted companies. It is likely as the law evolves including implementation by NCLT, unlisted companies will come to terms with the new ways of managing their affairs and hopefully will move towards better corporate governance practices.

Abhinav Surana is Partner, and Apurva Kanvinde is a Senior Associate at the Mumbai office of Juriscorp.

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