In a landmark decision by the Ministry of Corporate Affairs (MCA), Hyderabad, under the case number F.No:9/39/ADJ/Sec.203 of 2013/Karnataka/RD(SER)/2023, the penalty for non-appointment of a Company Secretary (CS) by IBM Global Financing India Private Limited was significantly reduced from a staggering ₹29,94,000 to ₹4,49,100. This case sheds light on the complexities of corporate compliance and the flexible approach of regulatory bodies towards unintentional non-compliance by companies, especially in challenging operational circumstances.
The Prelude to the Penalty Reduction
IBM Global Financing India Private Limited, along with its directors, found themselves in a challenging position due to their failure to appoint a whole-time company secretary, a requirement under Section 203 of the Companies Act, 2013, read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. This non-compliance spanned from 31st May 2016 to 26th May 2019 and again from 24th May 2022 to 17th March 2023, leading to the imposition of a hefty penalty by the Registrar of Companies (ROC), Karnataka.
The Appeal for Leniency
The appellants, including the company and its directors, filed an appeal under section 454(5) of the Companies Act, 2013, arguing that the non-appointment of a company secretary was not intentional. They highlighted several mitigating factors, including the company’s non-commencement of business, efforts to surrender its certificate of registration to the Reserve Bank of India (RBI), and the absence of employees, which rendered the appointment of a company secretary impractical for a significant period.
Judicial Deliberation and Verdict
The Regional Director, after careful consideration of the appeal and the circumstances presented, acknowledged the unintentional nature of the non-compliance. Recognizing the company’s efforts to comply with the Act and the unique operational challenges it faced, the penalty was substantially reduced. This decision underscored the importance of context in regulatory judgments, acknowledging that rigid enforcement of penalties without considering the business realities could be counterproductive.
The Significance of This Case
This case serves as a crucial reminder for businesses about the importance of adhering to statutory compliance requirements. It also highlights the potential for regulatory leniency in cases where non-compliance is unintentional and where companies show a genuine effort to rectify their mistakes.
Moreover, it underscores the MCA’s role in balancing strict compliance enforcement with a pragmatic approach to individual circumstances. This balance is vital for fostering a business environment that encourages both compliance and understanding of genuine operational challenges.
Key Takeaways for Businesses
- Strict Compliance is Paramount: Businesses must strive to meet all statutory obligations to avoid penalties. Regular audits and compliance reviews can help identify and rectify potential issues before they escalate.
- Open Communication with Regulators: In instances of non-compliance, proactive communication with regulatory bodies can help in mitigating penalties. Demonstrating a commitment to compliance and rectifying lapses promptly is often viewed favorably.
- Documentation and Evidence: Maintaining thorough documentation of efforts to comply, including challenges faced, can be crucial in appeals against regulatory decisions. This evidence can demonstrate the company’s intent and efforts to adhere to statutory requirements.
- Legal and Regulatory Guidance: Engaging with legal and compliance experts can provide businesses with the guidance needed to navigate complex regulatory landscapes effectively. This expertise can be invaluable in ensuring compliance and in dealing with potential non-compliance issues.
- Learning from Precedents: Cases like IBM Global Financing India’s serve as important precedents for other companies facing similar challenges. They highlight the potential for leniency and the importance of a reasoned approach to compliance and penalty imposition.
Conclusion
The significant reduction in the penalty for IBM Global Financing India by the MCA is a testament to the nuanced approach required in regulatory and compliance matters. It reinforces the idea that while compliance with corporate laws is non-negotiable, the context of non-compliance matters and can influence regulatory outcomes. Businesses must take heed of this case, ensuring strict compliance while also understanding that regulatory bodies can show leniency under compelling circumstances.
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F.No:9/39/ADJ/Sec.203 of 2013/Karnataka/RD(SER)/2023
Before the Regional Director, South East Region
Ministry of Corporate Affairs, Hyderabad
In the Matter of Companies Act, 2013 /6901
In the Matter of IBM Global Financing India Private Limited
1. M/s. IBM Global Financing India Private Limited
2. Sudhanshu Ramcharan Sharma, Managing Director
3. Kalahastheswaran Karthikeyan, Director
4. Addepalli Ushasri, Director
5. Anand Mantri, Director
6. Manish Prabhudayal Jhunjhunwala, Director
7. Nitin Srinivasa Murthy, Director
8. Praveen Kumar Jain, Director
Appellants
Date of hearing : 01.02.2024
Present : Mr. Joby Chacko, Advocate
ORDER
This is an appeal filed under section 454(5) of the Companies Act, 2013 by the above appellants in e-form ADJ vide SRN F88484316 dated 22.12.2023 against the adjudication order No. ROC(B)/Adj. Ord.454-203/IBM Global/Co.No.093733/2023/ dated 06.11.2023 under section 454 passed by the Registrar of Companies, Karnataka for default in compliance with the requirements of Section 203 read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.
2. Registrar of Companies in his order of adjudication has stated that the company has filed a suo-motu application on 24.08.2023 regarding non-appointment of whole-time company secretary i.e. violation of section 203 of the Act. The Company has submitted that, the Company was incorporated with paid up capital of Rs.52 Crores and company did not have company secretary till the appointment of Shanubhoganahalli Venkateshamurthy Pushpa on 27.05.2019, thereby violating the relevant provisions of the Act, from 31.05.2016 to 26.05.2019 i.e., 1091 days. Further, after the resignation of Shanubhoganhalli Venkateshamurthy Pushpa on 23.11.2021, the company did not have company secretary till the date the company was reduced its paid-up capital to 1 lakh as per Hon’ble National Company LAW Tribunal (NCLT) vide order dated 17.03.2023 which was below the threshold limit of Rs.10 crores for appointment of whole time company secretary, thereby violating the relevant provisions of the Act for non-appointment of company secretary from 24.05.2022 to 17.03.2023 i.e. 298 days. Hearing was held before Registrar of Companies on 27.09.2023 and after hearing the authorized representative had levied a penalty of Rs.5,00,000/- each on the Company and 3 directors i.e., Sudhanshu Ramcharan Sharma, Addepalli Ushasri and Anand Mantri Danda Brahmanandam and Rs.3,47,000/- each on 2 directors i.e., Kalahastheswaran Karthikeyan and Nitin Srinivasa Murthy and Rs.2,28,000 on Praveen Kumar Jain and Rs.72,000/- on Manish Prabhudayal Jhunjhunwala (total aggregating to Rs.29,94,000/-).
3. An opportunity of being heard was given to the Appellants on 01.02.2024. The authorized representative Mr. Joby Chacko, Advocate appeared on behalf of the appellants and reiterated the submissions made in the appeal and from the appeal it has been stated that the Appellant Company had not commenced the business and filed an application with Reserve Bank of India for surrendering its certificate of registration on June 06, 2017 and Reserve Bank of India approved the said application and de-registered on February 22, 2018. The Appellant company had not commenced its commercial operations and there were no employees in the Appellant company. All the directors were non-executive directors. As there was no business in the Applicant Company, despite its maximum efforts, could not identify and appoint a suitable Company Secretary except for a span of 2.5 years.
Non appointment of the Company secretary was not intentional or deliberate. The same was due to the reasons beyond reasonable control of the Appellants. Hence a liberal view may be taken to adjudicate and impose nominal penalty for the noncompliance of section 203 of the Companies Act, 2013. The Appellant No.1 is a Private Limited Company, and the Directors of the Appellant Company are keen in implementing the provisions of the Companies Act, 2013 in letter and spirit and are law abiding. However, non-compliance with the provisions of Section 203 of the Companies Act, 2013 were unintentional and without any malafide intention.
4. Though there is a default committed, there is a ground in interfering with the impugned adjudication order of Registrar of Companies to the extent of reducing the quantum of penalty due to the following reasons:
(a) Appellant Company had not commenced the business and filed an application with Reserve Bank of India for surrendering its certificate of registration on June 06, 2017 and Reserve Bank of India approved the said application and de-registered on February 22, 2018.
(b) The Appellant company had not commenced its commercial operations and there were no employees in the Appellant company. All the directors were non-executive directors.
(c) No business in the Applicant Company, despite its maximum efforts, could not identify and appoint a suitable Company Secretary except for a span of 2.5 years
Taking into consideration the facts of the appeal and submissions made by the authorized representative. I deem it would meet the end of justice if the penalty imposed by Registrar of Companies is reduced to 15% i.e., 75,000/- each for the Company and 3 directors i.e., Sudhanshu Ramcharan Sharma, Addepalli Ushasri and Anand Mantri Danda Brahmanandam, Rs.52,050/- each for 2 directors i.e., Kalahastheswaran Karthikeyan and Nitin Srinivasa Murthy, Rs.34,200/- on Praveen Kumar Jain and Rs.10,800/- on Manish Prabhudayal Jhunjhunwala (total aggregating to Rs.4,49,100/-). . The appellants are directed to comply with this order and also provisions of Section 454(8) of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Rules, 2014.
5. Accordingly, penalty was paid by the Company and 3 directors i.e., Sudhanshu Ramcharan Sharma, Addepalli Ushasri and Anand Mantri Danda Brahmanandam amounting to Rs.75,000/- each and by 2 directors i.e., Kalahastheswaran Karthikeyan and Nitin Srinivasa Murthy amounting to Rs.52,050/- each and by Praveen Kumar Jain amounting to Rs.34,200/- and by Manish Prabhudayal Jhunjhunwala amounting to Rs.10,800/- (total aggregating to Rs. 4,49,100/-) vide SRN’s X66794066, X66799578, X66815671, X66814955, X66803396, X66816075, X66818485 and X66816257 dated 08.02.2024 respectively. Accordingly, this order is issued to the Appellants with a copy to Registrar of Companies, Karnataka and Joint Secretary, E-Governance Cell, Ministry of Corporate Affairs, New Delhi for information and necessary action.
Issued under my hand and seal on this the 19th day of February 2024.
(DR. R SINGH)
REGIONAL DIRECTOR (SER)
HYDERABAD
