An ‘offence’ is defined as ‘any act or omission made punishable by any law for the time being in force’ under Section 3(38) of the General Clauses Act, 1897. Section 2(n) of Criminal Procedure Code 1973 (‘CrPC’) also defines ‘offence’ in the same way. A person guilty of committing an offence is liable to be prosecuted under the relevant provisions of law. Compounding of an offense in the context of law means an amicable settlement for the purpose of averting prosecution for an offense.
As per the Black’s Law Dictionary, to “Compound” means “to settle a matter by a money payment, in lieu of other liability.” This definition thoughtfully presents the concept of Compounding as a settlement mechanism that affords the offender an opportunity to avoid prosecution in exchange of him undertaking a liability that is pecuniary in character or otherwise. The landmark decision of the Calcutta High Court in Murray vs. The Queen-Empress lends the gist of this concept as one which “ signifies that the person against whom the offence has been committed has received some gratification, not necessarily of a pecuniary character, to act as an inducement of his desiring to abstain from a prosecution”.
The concept of compounding of offenses was incorporated as a measure to avoid the long drawn process of prosecution, which would save both cost and time in exchange of payment of a penalty to the aggrieved. In criminal law, the power to compound the offence is at the discretion of the victim. The perpetrator cannot demand for compounding of the offence. But in corporate law, compounding is at the discretion of the offender/offending company.
Through this Article, the Author endeavours to shed light on the scope and limitations of compounding under C-ompanies Act, 2013 in light of Section 24(1) of Companies Act, 2013 and the Supreme Court ruling in SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors.
COMPOUNDING UNDER COMPANIES ACT, 2013
The meaning of word ‘Compounding’ is not defined under Companies Act, 2013 or in the erstwhile Companies Act, 1956. However its substance can be deciphered from a thorough reading of Section 441 under the Companies Act, 2013. In the context of the framework, compounding of an offence is a process by which a corporate entity may come forward suo-moto or on receipt of notice of default/initiation of prosecution by making an application before the Tribunal, admitting to the commission of the offense and praying for condonation of the same.
The compounding provision in the Act was inserted by the Companies Amendment Act, 1988 on the recommendation of the Sachar Committee. It was felt that leniency is required in the administration of the provisions of the Act particularly penalty provisions because a large number of defaults are of technical nature and arise out of ignorance on account of bewildering complexity of the provisions.
A careful reading of section 441, will unfold that all the offences under the Companies Act are compoundable save those offences which attract imprisonment as a mandatory part of the prescribed punishment. In other words, only the following offences that can be compounded under the Companies Act, 2013:
1. Offences punishable with fine only;
2. Offences punishable with fine or imprisonment;
3. Offences punishable with fine or imprisonment or both.
As per the said provision, the Central Government and the Tribunal shall be responsible for compounding of the offenses under the Act, based on their respective pecuniary jurisdiction prescribed under the same. Where the offence to be compounded is punishable with a fine not exceeding Rs.5,00,000/-, it shall be compounded by the Regional Director or any other officer authorised by the Central Government. The Tribunal shall compound all those offences under the Act where the fine imposed exceeds Rs.5,00,000. Furthermore, in case the offence committed by a corporation or its officer has been compounded earlier, such a corporate entity shall not be eligible for compounding of a similar offence for a period of 3 years from the date of compounding the first offence.
THE LIMITATIONS OF COMPOUNDING UNDER COMPANIES ACT, 2013
Since the nature compounding of an offense involves a trade-off between admission of guilt and absolution of guilt for the offender, it invites a lot of repercussions. This Author believes a sentient effort has been taken to draft Section 441 of the Act with reasonable circumspection of such repercussion by laying down sensible limitations on the exercise of the power to Compound. However, every piece of legislation has its limitation and fallibility and this Section is no exception.
A plain reading of the section gives us a crystallized understanding that the jurisdiction to compound any offense under the Companies Act lies with the Tribunal/Central Government as the case maybe. The words of the section denote a mandatory obligation on the part of the Tribunal/Central Government to compound any offense punishable under this Act. Also, this Section provides no parameters to determine if the offender has come before the Tribunal/Central Government with clean hands and bona fide intentions. It predicts a very black and white state of events that will surround the process compounding under the Act. As a result, it removes any scope of discretion at the hands of the Tribunal/Central Government to determine whether the offender merits such a compounding of the offenses that were committed.
Given that the object with which the compounding provision was inserted in the Companies Act is to avoid cumbersome litigation on technical grounds, it is surprising that the section allows all offences under the Companies Act, save those that attract mandatory imprisonment, to be compounded. Without any strictures laid down in the provision to gauge which of the offences were an act of inadvertence and which ones were not, the concept of compounding runs the risk of being abused by the wrongdoers.
One other grey area of compounding under the Company Law is the limitation in its application in respect of the provisions relating to transfer and issue securities under chapter III and IV of the Companies Act, 2013. For the purpose of illuminating these inconsistencies within the provision, it is vital to bring to attention Section 24 (1) in chapter IV of the Companies act, 2013 which is produced below verbatim :
24. (1) The provisions contained in this Chapter, Chapter IV and in section 127 shall,—
(a) in so far as they relate to —
(i) issue and transfer of securities; and
(ii) non-payment of dividend,
by listed companies or those companies which intend to get their securities listed on any recognized stock exchange in India, except as provided under this Act, be administered by the Securities and Exchange Board by making regulations in this behalf;
(b) in any other case, be administered by the Central Government
The above-mentioned section articulates that the jurisdiction insofar as matters relating to transfer and issue securities in Chapter III and IV of the Act with respect to listed companies and companies with the intention to list itself in a recognized stock exchange, lies with the Securities and Exchange Board of India (SEBI).
Owing to notorious OFCD racket of Sahara, the Supreme Court found it necessary to interpret the meaning of “those companies which intend to get their securities listed” found in Section 24(1) of the Companies Act, 2013 or the erstwhile section 55A of the Companies Act, 1956 to include unlisted companies in certain circumstances. It was held that “Section 55A can never be constructed or interpreted to mean that SEBI has no power in relation to the prospectus and the issue of securities by an unlisted public company, if the securities are offered to more than forty nine persons” .
This clarification on the intention and meaning of Section 24(1) by the Supreme Court has led to further uncertainty in the application of compounding to the provisions relating to transfer and issue securities contained within chapter III and IV of the Companies Act.
In view of the above-mentioned judgment, a conundrum would now present itself when a compounding application under Section 441 is made by an unlisted company to compound an offence under Chapter III or IV of the Act in relation to the issue of securities to more than 49 persons, as the jurisdiction in such a matter would fall within the purview of SEBI’s governance considering section 24(1), but at the same time, it would also be within the jurisdiction of the Tribunal/Central Government in light of Section 441.
What further complicates the issue is that both pieces of legislation viz., SEBI Act and Companies Act, have provisions for compounding offences under its respective legislations. As a result, there is severe ambiguity as to who between the Central Government and SEBI has the jurisdiction in respect of the compounding of offenses committed under the provisions of Chapter III and IV of the Act.
When the legislation does not adequately address a particular issue or is ambiguous in its nature, the judiciary takes it upon itself to rectify the deficiencies by astute and sagacious interpretations of the law keeping in mind the legislative intent. However, a definitive solution to the above-mentioned predicament is yet to be arrived at as there have not been many precedents set to make clear the issues cited above by this author.
When the jurisdiction in matters relating to issue and transfer of securities under Chapter III and IV of the Companies Act 2013 by an unlisted company falls within the ambit of SEBI’s governance, compounding it under Companies Act will defeat the purpose of section 24(1). Therefore the offences under Chapter III and IV relating to issue and transfer of securities must be compounded under Section 24A of the SEBI Act, 1992.
It was further held by the Supreme Court in the SEBI vs. Sahara India Real Estate Corporation Ltd. & Ors. that:
“From a collective perusal of sections 11, 11A, 11B and 11C of the SEBI Act, the conclusions drawn by the SAT, that on the subject of regulating the securities market and protecting interest of investors in securities, the SEBI Act is a standalone enactment, and the SEBI’s powers there under are not fettered by any other law including the Companies Act, is fully justified. In fact the aforesaid justification was rendered absolute, by the addition of section 55A in the Companies Act, whereby, administrative authority on the subjects relating to “issue and transfer of securities and non payment of dividend” which was earlier vested in the Central Government (Tribunal or Registrar of Companies) came to be exclusively transferred to the SEBI.”
The above-mentioned judgment makes amply clear that in the matters of regulating the securities market, SEBI’s jurisdiction will override all other laws including Companies Act, 2013. Hence, the Compounding provision under Section 441 will have no application in matters that shall fall within the ambit of SEBI in light of Section 24(1) of Companies Act, 2013.
This judgment brings the much needed clarity on the question of which authority has the jurisdiction in respect of the offences relating to issue and transfer of securities under Chapter III and IV of the Companies Act. However, it is not specific to the issue of compounding. Therefore, it would also be reasonable to interpret that the power of SEBI under Section 24(1) and the Central Government’s power to compound offenses under section 441 of the Companies Act, are parallel in nature and are independent of one another. This would mean that the compounding of the offences under Companies Act by the Central Government would not affect the proceedings under the SEBI Act.
This view was upheld by SEBI in Vibgyor Allied Infrastructure Ltd matter wherein it was held that:
“In this regard, I note that under section 621A of the Companies Act, the Central Government can compound any offence punishable with imprisonment only, or with imprisonment and also with fine under the Companies Act either before or after the institution of any prosecution. Such compounding bars only institution of prosecution for the offence under the Companies Act which has been compounded. Such compounding does not apply with regard to an offence under the SEBI Act and the regulations and it does not bar or preclude the civil proceedings under the Companies Act or the SEBI Act or the regulations made there under.
Conversely, this judgment does not address how SEBI can independently compound the offences committed by an unlisted company under the relevant SEBI regulations as a consequence of making a public offer under the Companies Act. Since the definition of what constitutes a ‘public offer’ is only found under Companies Act, the compounding of violations committed under the relevant SEBI regulations is dependent upon not compounding the offense of public offer and other related offenses under Companies Act. If at all the offense of public offer and other related offenses under the Companies Act are compounded under Section 441, it would lead to the offender’s acquittal from all the other contravention under the relevant SEBI regulations by way of concomitancy along with the offense committed under Companies Act.
These ambiguities in the compounding provision are likely to lead to an increase in litigation, challenging SEBI’s powers to initiate prosecution against the offenders in these circumstances. The issue is also likely to increase the friction between SEBI and the Department of Company Affairs. The Central Government needs to bring clarity in the compounding provision in this respect so that it benefits all concerned.