Decriminalization of Companies Act Offences – Has it Improved Ease of Doing Business?

This article is written by Nisha kiran, BA-LLB, 2022, PRESIDENCY UNIVERSITY,BANGALORE during her internship at LeDroit India.

Abstract

Decriminalization, Companies Act, Ease of Doing Business: In recent years, India has embarked on a mission to decriminalize offences under the Companies Act, 2013 as part of a broader push to enhance the ease of doing business. By reclassifying minor corporate compliance violations from criminal offences to civil penalties, the government aims to foster a more business-friendly regulatory climate. This abstract provides an overview of the initiatives to decriminalize company law offences and examines whether these reforms have tangibly improved India’s business environment. It summarizes key amendments (in 2019 and 2020) that removed or diluted criminal penalties for technical non-compliances, the rationale behind these changes, and their impact on corporate compliance and legal processes. The discussion also highlights illustrative cases and judgements, as well as opinions on whether easing punitive provisions has indeed reduced bureaucratic hurdles and encouraged investment, or if it risks weakening corporate governance. The analysis concludes with a critical assessment of how decriminalization has influenced India’s ease of doing business, using relevant keywords and case references to ground the findings in practical outcomes.

Introduction

The Companies Act, 2013 traditionally contained numerous penal provisions, reflecting a strict regulatory approach wherein failures to comply (even with procedural requirements) could trigger criminal prosecution. As of the Act’s original enactment, there were 134 sections imposing criminal liability for non-compliance. This punitive regime was rooted in the deterrence doctrine – the belief that fear of criminal sanctions would ensure corporate compliance. However, such a stance often made India’s corporate legal landscape compliance-heavy and intimidating for businesses. Minor lapses, like delayed filings or technical defaults, could result in court cases, contributing to protracted litigation and burdening special courts with a backlog of trivial offences. Critics pointed out that treating procedural missteps as crimes deterred entrepreneurship and investment, as even well-meaning companies faced the threat of jail terms or fines for marginal infractions.

In the past decade, the Government of India launched an aggressive reform agenda to improve the nation’s standing in the World Bank’s Ease of Doing Business index. India’s rank dramatically improved from 142 in 2014 to 63 in 2019 coinciding with numerous regulatory simplifications across various domains. Within corporate law, a central reform theme was “trust-based governance” – shifting from criminalizing compliance violations to encouraging voluntary compliance through civil enforcement mechanisms. This led to the decriminalization of many Companies Act offences, aiming to reduce fear of unwarranted prosecutions and to streamline dispute resolution. Decriminalization in this context does not mean legalizing wrongful acts; rather, it involves reclassifying certain offences as “civil wrongs” punishable with monetary penalties (adjudicated administratively) instead of criminal fines or imprisonment (which require court trials). Serious violations involving fraud or public interest harm remain criminal, but minor, technical or procedural defaults are now largely handled through an in-house adjudication mechanism instead of the criminal courts.

The driving philosophy behind these changes is to promote ease of doing business by treating entrepreneurs as “partners in growth” rather than potential criminals. By reducing the criminal law overhang, the government expects companies – especially startups and smaller enterprises – to operate with less fear of litigation, thereby focusing on innovation and growth. At the same time, the reforms aim to unclog the courts and NCLT (National Company Law Tribunal) by handling petty violations through quicker, administrative proceedings. The critical question is whether this decriminalization of Companies Act offences has indeed translated into a more conducive business environment, or if it merely provides cosmetic relief without substantial impact on the ground. To answer this, one must examine the specific amendments enacted, their implementation (including key case law outcomes), and the measurable effects on compliance and business operations.

Key Reforms: Decriminalization under Companies (Amendment) Acts 2019 and 2020

Many decriminalization measures were introduced in two phases: first in the Companies (Amendment) Act, 2019 and then more extensively by the Companies (Amendment) Act, 2020. These amendments were driven by expert penal ’ recommendations. In 2018, the Ministry of Corporate Affairs (MCA) set up a panel chaired by Mr. Injeti Srinivas to review offences under the Act and suggest which could be decriminalized. The panel (Company Law Committee, or CLC) identified dozens of minor and technical offences suitable for reclassification as civil infractions. Acting on these recommendations, the 2019 Amendment Act re-categorized 16 sections  from criminal offences to civil penalties This was only the start; a second Company Law Committee in 2019 examined 66 remaining compoundable offences and recommended a sweeping decriminalization affecting 46 provisions. The result was the Companies (Amendment) Act, 2020, which implemented most of these recommendations.

Key aspects of the 2019 and 2020 amendments include:

• In-house Adjudication Mechanism (IAM): Sixteen minor offences were shifted from the courts to an in-house adjudication framework via the 2019 amendment. Under Section 454 of the Act, central government-appointed officers (not below ROC rank) can now adjudicate and levy penalties for designated defaults. The 2020 Act expanded this by moving 23 more offences to the IAM system. For example, failure to register a share transfer (Section 56) or not maintaining a register of members (Section 88), which earlier could attract fines or imprisonment, are now subject to monetary penalties imposed by the Registrar of Companies (ROC) without a court trial. The adjudication process is largely electronic, enabling companies to communicate with the officer and rectify defaults remotely, saving time and resources.
• Removal or Reduction of Imprisonment: The amendments removed incarceration as a punishment for many offences that were deemed not to involve fraud or public injury. The CLC classified offences by severity and determined that those involving subjective judgment but not serious wrongdoing should be punishable with fine only (no jail). Accordingly, the 2020 Act eliminated imprisonment for 11 offences and limited punishment to fines. For instance, contraventions of certain corporate governance norms or failure to file resolutions now incur only fines (or penalties) instead of potential imprisonmentt. Even where fines remain, the quantum was often reduced to make penalties more proportionate.
• Omitting Redundant Offences: The law completely omitted 7 compoundable offences that were considered redundant or better covered under other laws. This tidying-up ensured companies are not penalized twice for the same slip and that inconsequential provisions do not lead to prosecutions For example, certain offences related to non-compliance with orders (which could be handled through contempt powers of courts or tribunals) were removed as separate criminal offences in the Act.
• Alternative Sanctions Framework: In a few cases (5 instances as per CLC), offences were neither decriminalized nor left as-is, but shifted to alternative frameworks. One cited example is that violations of NCLT orders would be handled via the NCLT’s contempt jurisdiction rather than treating them as criminal offences under the Companies Act. This ensures a more fitting response to specific non-compliances without overburdening criminal courts.

These reforms collectively decriminalized or diluted punishment for over 60 offences (16 in 2019, ~46 in 2020), marking a substantial shift in the enforcement philosophy of company law. Minor violations (like late filing of annual return, missing a deadline for financial statement submission, not updating certain registers, etc.) no longer make company officials potential “criminals”. Instead, such lapses result in civil penalties adjudicated summarily by the ROC, often resolved by paying a prescribed amount. This reduces mens rea considerations and procedural complexities – as the Supreme Court observed in Director of Enforcement v. MCTM Corporation, penalties under regulatory laws impose liability for “blameworthy conduct” without requiring proof of guilty intent.

Illustrations and Case Law: Implementation of Decriminalization

The impact of these amendments is best understood through examples and judicial rulings that followed. A landmark instance is the treatment of pending prosecutions for offences that were decriminalized by the 2020 amendment. The Madras High Court’s 2023 decision in M/s. Shine School of Excellence Pvt. Ltd. v. Registrar of Companies is instructive. In that case, directors of a company were prosecuted for failing to file the annual return and financial statements for the year 2016–17, offences under Sections 92(5) and 137(3) of the Companies Act. While the criminal case was ongoing, the law changed – by virtue of the 2019 Amendment, these offences (failure to file annual return/financials) had been relegated to mere “penalties” adjudicated by ROC rather than crimes. The petitioners argued that continuing with a criminal trial despite the amendment would be unjust, especially since they eventually filed the documents and even paid late penalties to the ROC. Citing the Supreme Court’s doctrine from T. Barai v. Henry Ah Hoe (1983) that beneficial amendments reducing punishment should apply to pending cases, the High Court agreed.

In Shine School (2023), Justice Sunder Mohan emphasized that the legislative intent behind the 2019/2020 amendments was to ease doing business and reduce prosecutions for technical defaults. The Court noted that what was once an “offence” triable by a Special Court had become a “default” punishable with a monetary penalty under an administrative regime. Therefore, it held that the pending prosecution could not continue, since the act was “no longer an offence” in view of the amendment. The judge ordered that all such prosecutions be withdrawn and the matters be transferred to the adjudicating authority (ROC) for levying penalties as per Section 454. This judgment explicitly recognized the decriminalization amendment’s retrospective protective effect:

“Parliament had made amendments for the purpose of easing the doing of business and reducing prosecutions… there is no reason why the amendment cannot be applied in favour of the accused in pending prosecution. The amendment pacify the rigour of punishment – therefore the vital construction must be applicable to pending cases, and all prosecutions must be withdrawn and transferred to the adjudicating authority under Section 454.”

As a result, the directors in Shine School were spared a criminal trial; instead, their default was dealt with by the ROC imposing a late fee/penalty. This case is a clear example of decriminalization improving ease of doing business – a lengthy court proceeding was averted in favor of a swift administrative resolution, allowing the entrepreneurs to focus back on their school business after paying the due penalty.

Has Ease of Doing Business Improved?

The above reforms and their implementation strongly suggest a positive answer – yes, decriminalization of Companies Act offences has improved the ease of doing business in India, albeit with some caveats. By removing the threat of criminal action for minor compliance issues, India’s corporate regulatory atmosphere has become more relaxed and “trust-based”, encouraging honest entrepreneurs to operate without constant fear of imprisonment for inadvertent lapses. Several specific outcomes bolster this conclusion:

• Faster Resolution of Compliance Defaults: Corporate defaults that would previously result in court cases (taking years to conclude) are now resolved in a matter of months through adjudication orders. The surge in ROC orders (157 in 2019 to 765 in 2023) shows that thousands of cases have been diverted away from courts. Businesses can simply pay a monetary penalty and “move on after paying the penalty rather than fighting prosecution”, as officials observed. This agility directly contributes to ease of doing business – management time and legal expenses are saved, and the uncertainty of criminal proceedings is avoided.
• Reduced Litigation and Lower Compliance Costs: Decriminalization has significantly reduced the number of prosecutions the government pursues. The MCA’s withdrawal of over 7,000 pending cases in 2023 is evidence of a lighter litigation footprint. Less litigation means lower legal costs for companies and less diversion of resources towards handling court cases. As mundane disputes move out of courts, the judicial system can focus on serious corporate frauds and insolvency matters, potentially yielding faster outcomes there too. For companies, compliance now often means a financial consequence (penalty) rather than entanglement with criminal lawyers and court appearances. This more predictable and business-like handling of defaults improves confidence in the regulatory regime.
• Focus on Substance over Form: A critical benefit is that corporate officers can focus on substantive business operations and governance, rather than being overly occupied with procedural compliance to avoid jail. The decriminalized regime maintains accountability (through financial penalties) but is more forgiving of technical or venial breaches. This allows businesses to allocate resources and attention to innovation, expansion and sound governance practices. For instance, the removal of the mandatory company seal and other such small compliance burdens were steps in the same direction. In essence, the regulatory burden has been recalibrated to be more reasonable. Honest mistakes or delays can be corrected by paying a fee, whereas deliberate fraud still attracts harsh punishment – a balanced approach.

Nonetheless, it is important to temper the optimism with some critical observations. Decriminalization is not a remedy, and its success in improving the business climate depends on effective implementation and maintaining a balance so as not to undermine corporate governance:

• No Immunity for Serious Violations: The reforms have rightly kept fraudulent and egregious violations criminal. Offences involving an element of intent to deceive, harm to public interest (like fraud, siphoning of funds, serious corporate misconduct) remain subject to criminal prosecution. The Company Law Committee explicitly retained 20 serious offences as criminal (non-compoundable), recognizing that ease of doing business cannot come at the cost of investor protection or market integrity. Thus, while ease of doing honest business has improved, the legal system still comes down hard on willful wrongdoers – preserving overall confidence in corporate governance. The balance struck by the CLC was to “walk a tightrope” and not sacrifice deterrence where needed. This appears to have been achieved in the letter of the law.
• Monitoring and Oversight of the New Regime: Shifting numerous decisions to ROCs and adjudicating officers (who are executive officials) raises questions of consistency and oversight. Some commentators caution that replacing judicial oversight with executive adjudication could lead to uneven enforcement or even potential for corruption if not properly supervised. The government must ensure that adjudicating officers exercise their powers transparently and fairly, and that companies have adequate avenues to appeal or review penalty orders (appeals lie to Regional Directors under Section 454(5) of the Act). If the in-house mechanism becomes too lenient or too stringent in practice, it could either embolden non-compliance or recreate bottlenecks – either outcome would dilute the ease-of-business gains. So far, MCA’s data showing thousands of penalties imposed suggests the mechanism is active, and the absence of public controversy implies it’s working reasonably. Still, continuous monitoring is needed to maintain the right balance between facilitation and enforcement.

In sum, the critical conclusion is that decriminalization of Companies Act offences has positively impacted the ease of doing business in India by reducing unnecessary criminal proceedings, expediting compliance resolutions, and signaling a more investor-friendly regulatory ethos. Empirical signs – from improved compliance turnaround to reduced pending cases – support this. India’s corporate sector has welcomed the reforms, and the government continues to extend the approach (e.g. decriminalizing LLP Act offences, proposing the Jan Vishwas (Trust in Governance) Bill to decriminalize provisions across statutes

References

1. Press Information Bureau (MCA) – “MCA approves withdrawal of another 7,338 prosecutions pending before various courts…” (Press Release, 14 July 2023)pib.gov.inpib.gov.in. (Announces withdrawal of prosecutions in light of decriminalization drive.)
2. Arun Kumar, IndiaCorpLaw Blog – “Decriminalisation of Company Law: A Welcome Change” (Jan 7, 2020)indiacorplaw.inindiacorplaw.in. (Discusses the 2019 CLC report and rationale for civil liability vs criminal liability in corporate law, citing Director of Enforcement v. MCTM Corporation.)
3. Madras High Court – M/s Shine School of Excellence (P) Ltd. v. ROC, Crl. O.P. No. 30374 of 2019, judgment dated 6 April 2023. (Available on Indian Kanoon & Casemine)taxmanagementindia.comtaxmanagementindia.com. (Held that 2019/2020 amendments apply to pending cases; ongoing prosecutions for decriminalized offences were quashed and transferred to ROC adjudication.)
4. Livemint (G.C. Prasad) – “How RoCs raised the game after company law decriminalization” (23 Nov 2023)livemint.comlivemint.com. (Reports fivefold jump in ROC penalty orders from 2019 to 2023 and quotes officials on decriminalization improving ease of doing business.)
5. Companies (Amendment) Act, 2020 – Key Provisions Summary, Ministry of Corporate Affairstaxtmi.comtaxtmi.com. (Converted 23 offences to in-house penalties, removed imprisonment for 11 offences, omitted 7 offences, etc., to promote ease of doing business.)
6. Blog.iPleaders – “Decriminalisation of Offences under Companies Act” (May 21, 2022)agamalaw.inagamalaw.in. (Analyzes the basis of decriminalization, with pros/cons and impact on ease of doing business, corporate governance, CSR, etc.)
7. Supreme Court of India – Director of Enforcement v. MCTM Corporation Pvt. Ltd., (1996) 2 SCC 471indiacorplaw.in. (Held that mens rea is not required for imposing civil penalties for regulatory breaches – a principle supporting the shift to civil enforcement in company law.)
8. Supreme Court of India – Hindustan Steel Ltd. v. State of Orissa, (1970) 25 STC 211 (AIR 1970 SC 253). (Established that penalty for technical statutory defaults should not be imposed in a routine manner, especially when the default is trivial or due to bona fide reasons – echoing the ethos behind decriminalization of minor company law offences.)