The ‘Registrar’ of Companies (‘RoC’) under the Companies Act, 2013 (‘Act’) is entrusted with the duty to register the companies in India and to discharge various functions under the Act, one of them being to adjudicate penalties in accordance with Section 454 of the Act.
Scope under the Act
Section 454 of the Act authorises the RoC to impose penalties against any non-compliance or default committed by the company, officer who is in default or any other person as the case may be. It can direct a company to rectify the default in a manner it deems fit. Further, the RoC is authorised under Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014 to issue written show cause notice to submit responses with respect to the claims made by the RoC, to summon and enforce physical appearance of any person acquainted with the facts and circumstances, and to order for evidence or to produce any relevant document. The concerned provision also focuses on adjudging only the quantum of penalty i.e. penalty being monetary in nature and not otherwise.
Recently, the RoC NCT of Delhi and Haryana in exercise of its power conferred under Section 454 of the Act passed an Order dated 8 January 2024[1] (‘Penalty Order’) adjudicating penalty for violation under Section 89 (Declaration in respect of Beneficial Interest in any share) and Section 90 (Register of Significant Beneficial Owner in a company) in the matter of Metec Electronics Private Limited (‘Subject Company’).
Background of the Penalty Order
The RoC took decisive action against the Subject Company and its affiliated individuals for concealing beneficial ownership ties with a Chinese group of companies i.e., Metec Group.
The 38-page Penalty Order issued in this regard is one of its kind, where the RoC meticulously scrutinized every aspect of the case around the issue of Subject Company adjudging the necessity of disclosing beneficial interest. The investigation encompassed a review of trademark registry records, scrutiny of email IDs used, assessment of the objections and statements filed, examination of the Balance Sheets along with other financial statements, and an analysis of the Chinese group’s websites to establish links of the Metec Group with the Subject Company.
The RoC conducted multiple hearings summoning all relevant individuals to the proceedings, and went to the extent of inspection and conducting ‘inquiry’ into the affairs of the Subject Company and upon a meticulous examination of various documents, such as applications for a common trademark in both India and China, the Corporate Insolvency Resolution Process (‘CIRP’) proceeding documents filed by Metec China, and a scrutiny of websites and LinkedIn pages belonging to these companies, it has identified connections between the Subject Company and the Metec group in China.
Consequently, the RoC concluded that: (a) the Subject Company and its present shareholders failed to make a declaration of beneficial interest under Section 89 of the Act; and (b) the Subject Company, Mr. Jiangping Hu (Operations Director), and other directors failed to make a declaration of significant beneficial ownership in the Subject Company under Section 90 of the Act.
Accordingly, the RoC issued the Penalty Order adjudicating the quantum of penalty under Section 89 and 90 of the Act. Going forward, the RoC in view of Section 89(8) of the Act had surprisingly debarred the Subject Company and any of its directors, employees or agents to enter into any fresh agreements with the Metec group of companies in China and Hong Kong.
Analysis of the Penalty Order and its implications
Extension of jurisdiction to conduct inquiry and inspection under Section 206 & 207 of the Act
Section 206 (Power to Call for Information, Inspect Books and Conduct Inquiries) and Section 207 (Conduct of inspection and inquiry) of the Act specifically authorises the RoC to conduct inquiry and inspection if it is of such opinion upon scrutiny of any document received by the company. While adjudicating this Penalty Order, it appears that the RoC conducted extensive inquiry and inspection (as explained above) beyond its jurisdiction under Section 454. To substantiate this, it is important to note that Companies (Adjudication of Penalties) Amendment Rules, 2019 dated 19 February 2019, specifically excluded the word ‘inquiry’ from the ambit of Section 454 and therefore it can be interpreted that RoC’s shall not be exercising its power of inquiry while adjudicating penalty under Section 454. Hence, the RoC’s conduct while adjudicating the concerned Penalty Order might be questionable.
Extent of RoC’s direction to rectify the default
Section 454(3)(b) of the Act authorises RoC to issue directions to rectify the default ‘wherever he considers fit.’ This discretion must be utilised reasonably on case-to-case basis. Table-IB of the Penalty Order states about further directions issued pursuant to Section 454(3)(b) of the Act. It provides that the Subject Company is debarred from entering into any fresh agreements with entities of Metec group in lieu of the embargo placed under Section 89(8) of the Act on the beneficial owner to exercise or enforce its rights whether through itself or any other persons till the e-Form MGT-6 is filed by the Subject Company. It is evident that any ‘direction’ ought to be issued only for the purpose of rectification of the default. The linkage between debarment and rectification of default i.e., filing of e-Form MGT-6 appears to be ambiguous in nature. As far as rectification of default is concerned, a plain order for filing e-Form MGT-6 by the Subject Company would suffice and its subsequent non-filing can be very well covered under the ambit of Section 454(8) of the Act.
Hence, such debarment can be interpreted as overstepping of the RoC’s discretion of ‘wherever he considers fit’ and the same falling under the purview of adjudging penalties and giving directions might be questionable.
Implications under Press Note-3 released by Department for Promotion of Industry and Internal Trade (DPIIT)
Press Note-3 was released by DPIIT under the Ministry of Commerce and Industry[2]. It states that ‘….an entity of a country, which shares land border with India or beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.’ Any subsequent investment subsequent to this Press Note-3 shall attract compliance under it. The Penalty Order by the RoC concluded that concerned operations director is a significant beneficial owner (SBO) of the Subject Company as he exercises significant influence by virtue of his majority shareholdings in entities of Metec group. If this conclusion is followed, an application before the DPIIT must be placed for acting as a beneficial owner of an investment into India. This conclusion would create implications for the Subject Company as the beneficial owner belongs to a country which share land border with India i.e., China, which would now be required to undertake specific approval from the DPIIT for the same. Separate prosecution by the RBI under Foreign Exchange Management Act, 1999 (FEMA) can be foreseen in such circumstances. Hence, the ambit of this Penalty Order would have far reaching implications for the Subject Company.
Concluding thoughts
It has been observed that the RoC has taken a stricter approach with respect to compliances and various penalty orders are being passed concerning even minutest non-compliance. Although this stricter approach in the form of detailed investigation and inquiry is lauded pursuant to the good corporate governance practice but the foundation for the same shall not be built on the premise of excessive authority and unreasonableness.
[The authors are Partner and Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[1] Order for Penalty for Violation Under Section 89 and 90 of the Companies Act, 2013 in the matter of Metec Electronics Private Limited (U74999DL2019PTC347291), RoC NCT of Delhi & Haryana, Ministry of Corporate Affairs.(Available here: https://www.mca.gov.in/bin/dms/getdocument?mds=WubCJs0HH%252F%252BH%252B50pbBhnaw%253D%253D&type=open)
[2] Press Note 3 (2020 Series), Department for Promotion of Industry and Internal Trade (Available here: https://dpiit.gov.in/sites/default/files/pn3_2020.pdf).
