New Delhi: A prison term of three years and a fine of up to Rs50 lakh may seem insufficient to deal with the promoters of companies who mislead investors while raising money, but they are significantly tougher than the existing punishment—a term of two years and a fine of up to Rs1 lakh.
The new punishment is part of the Companies Bill 2008, which was cleared by the cabinet on Friday and will be tabled in Parliament in the session that begins 17 October.
An official at the ministry of corporate affairs, or MCA, who did not wish to be named said the Bill will also make such offences “non-compoundable”, a term that means it cannot be mutually settled between the two parties. MCA is the ministry that oversees adherence to the Companies Act.
Stringent measures: Minister for corporate affairs Prem Chand Gupta has said reducing approvals needed from government, besides penalties for non-compliance, are some of the features of the new Bill.
Under the existing Companies Act, which came into effect in 1956, criminal liability for misleading investors is “compoundable”, making it easier for defaulters to settle disputes. “Any misstatement in the prospectus inviting any person to subscribe to shares or debentures may result in the promoters being imprisoned for three years besides paying a penalty of Rs25 lakh,” the official said. “Depending on the gravity of the crime, the penalty can involve either of the two or both.”
Where initial public offers of shares, or IPOs, are involved, the maximum penalty under the new Bill will rise to Rs50 lakh. The Bill, four years in the making, also boasts several other provisions of a similar nature to deal with promoters and companies that mislead investors, according to the official. “These are but a few examples of what the proposed Bill actually contain,” he said, but would not elaborate. The objective is to penalize and punish promoters who intentionally mislead investors, the official added.
“Unlike a compoundable case, a non-compoundable case doesn’t keep any room for a compromise between the accused and the aggrieved by say, paying additional fine, once the matter reaches the court and, therefore, comes (down) more heavily onthe defaulters,” said Vivek Aggarwal, a Delhi-based lawyer.
Corporate lawyer Lalit Bhasin added: “If the penalties are raised in cases of default, it is fine, but the prosecution should happen only in cases where there are intentions of default. A lot of times companies may go wrong due to oversight or wrong interpretation and therefore are not wilful defaulters.”