Chapter 20 Due Diligence-II Non Compliances, Penalties and Adjudications – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Due Diligence-II Non Compliances, Penalties and Adjudications – Secretarial Audit, Compliance Management and Due Diligence Study Material
Question 1.
What is meant by contravention and compounding of contravention? (June 2018, 5 marks)
Answer:
The meaning of the word contravention as per oxford’s dictionary is as follows:
An action which offends against a law, treaty, or other ruling. Contravention is not obeying any law or rule or doing anything that any law under force or regulations made thereunder do not permit.
“Compounding” means “to settle a matter by a money payment, in lieu of other liability.” This meaning clearly defines the concept of Compounding as a mechanism that provides the offender an opportunity to avoid prosecution from the offence committed by him after paying off monetary payment.
Compounding of an offense in the context of law means an amicable settlement for the purpose of preventing prosecution for an offense, however, Compounding is not an inherent right but provided/delegated by , the respective Act under which the offence has been committed.
1. As far as Foreign Exchange Management Act, 1999 (FEMA), the provisions of section 15, permit compounding of contraventions and empowers the Reserve Bank of India (RBI) to compound any contravention as defined under section 3 of the FEMA, except contraventions under section 3 (a) of FEMA, on an application made by the person committing such contravention.
Further, where a contravention has been compounded as above, there cannot be any further proceeding, initiating or continuing, as the case may be, in respect of the contravention so compounded.
2. The provisions of Section 13, provides that if any person contravenes any provision of FEMA, or any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up’to thrice the sum involved in such contravention, where the amount is quantifiable or up to Rupees Two lakhs, where the amount is not directly quantifiable and where the contravention is a continuing one, further penalty which may extend to Rupees Five thousand for every day after the first day during which the contravention continues.
3. Whereas, in exercise of the powers conferred by Section 46 read with sub-section (1) of Section 15 of FEMA, the Central Government had made the Foreign Exchange (Compounding Proceedings) Rules, 2000 relating to compounding contraventions under chapter IV of FEMA which were effective from 03.05.2000.
Power to Compound:
If any person contravenes any provisions of FEMA except Clause (a) of ( Section 3 of that Act then the following authorities under RBI shall have power to entertain the Compounding application on the basis of monetary limits, which are as follows:
| Monetary Limit | Manager of RBJ |
| 1. ₹ Ten Lakh or less | Assistant General Manager |
| 2. More than ₹ Ten Lakh but less than Rupees Forty Lakh | Deputy General Manager |
| 3. ₹ Forty Lakh or more but less than ₹ Hundred Lakh | General Manager |
| 4. ₹ One Hundred Lakh or more | Chief General Manager |
Question 2.
Prepare a note on provisions with respect to punishment under Section 392 of the Companies Act, 2013 for contravention of the provisions by a foreign company. (June 2019, 3 marks)
Answer:
Punishment for Contravention:
Without prejudice to the provisions of section 391, if a foreign company contravenes the provisions of this Chapter, the foreign company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and in the case of a continuing offence, with an additional fine which may extend to fifty thousand rupees for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees.
Question 3.
What are the criteria for suspension of the trading in the shares of the listed entities ? Describe. (Dec 2019, 5 marks)
Answer:
If a listed entity is non-compliant with the provisions of the Listing Regulations as per the criteria specified below, the concerned recognized stock exchange(s) shall suspend trading in the shares of such listed entity by following procedure prescribed in the SEBI Circular No. SEBI/HO/CFD/ CMD/CIR/P/2018/77 dated May 3, 2018.
Criteria for suspension of the trading in the shares of the listed entities are as under:
(a) Failure to comply with regulation 17(1) with respect to board composition including appointment of woman director for two consecutive quarters;
(b) Failure to comply with regulation 18(1) with respect to constitution of audit committee for two consecutive quarters;
(c) Failure to comply with regulation 27(2) with respect to submission of corporate governance compliance report for two consecutive quarters;
(d) Failure to comply with regulation 31 with respect to submission of shareholding pattern for two consecutive quarters;
(e) Failure to comply with regulation 33 with respect to submission of financial results for two consecutive quarters;
(f) Failure to comply with regulation 34 with respect to submission of annual report for two consecutive financial years;
(g) Failure to submit information on the reconciliation of shares and capital audit report for two consecutive quarters;
(h) Receipt of the notice of suspension of trading of that entity by any other recognized stock exchange on any or all of the above grounds.
Question 4.
Differentiate Fine and Penalty as per the Companies Act, 2013. (Dec 2020, 3 marks)
Answer:
The Companies Act, 2013 contains provisions for adjudication of penalties bv officers of the Central Government. Fine and penalty, though may sound similar, but are different. Fine can be imposed only by a Court of law, but penalty may be imposed even by an administrative office(r). Therefore, imposition of fine requires prosecution in a Court ot law, whereas penalty may be imposed by way of adjudication. The process of imposing fine and levying penalty are also different. Penalties creates the liability on non-compliance of the provisions and Fine is imposed by way punishment,
Question 5.
ABD Limited (listed Company) has failed to redress ‘ investors’ grievances relating to the Transfer of the share and indulges in fraudulent and unfair trade practices relating to securities. Write down the penalties which could be faced by the company under SEBI Act, 1992. (Dec 2021, 5 marks)
Answer:
Penalty for failure to redress investors’ grievances:
Section 15C of the SEBI (Act) 1992: If any listed company or any person who is registered as an intermediary, after having been called upon by the Board in writing, tc redress the grievances of investors, fails to redress such grievances within the time specified by the Board, such company or intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Penalty for fraudulent and unfair trade practices:
Section 15HA of the SEBI (Act) 1992: If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty I which shall not be less than five lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher.
Question 6.
Mr. Ronu an Indian national, failed to realize and repatriate foreign exchange amounting to ₹ 1 crore. Subsequently, Mr. Ronu realized that he has committed a contravention of the Foreign Exchange Management Act, 1999. He desires to compound the said offence. State, whether Mr. Ronu can do so? (Dec 2017, 5 marks)
Answer:
Compounding refers to the process of voluntarily admitting the contravention, pleading guilty and seeking redressal.
This problem is related to Section 15 of the Foreign Exchange Management Act, 1999. Mr. Ronu has failed to realise and repatriate foreign exchange and contravened the provisions of Section 8 of FEMA and he is liable to the penalties leviable under section 13 of the Foreign Exchange Management Act, 1999 followed by adjudication proceedings.
Section 15 of the Foreign Exchange Management Act, 1999 permits the offending party to compound the contravention within 180 days from the date of receipt of application by the Directorate of Enforcement or such other offices of the Directorate of Enforcement and officers of RBI as may be authorised by Central Government is such manner as may be prescribed. No Contravention shall be compounded unless the amount involved in such contravention is quantifiable. Where a contravention has been compounded, no proceeding can continue or be initiated against the person in respect of the contravention so compounded.
Question 7.
ABC Limited is a non-compliant listed entity suspended under the Standard Operating Procedure for non-compliances under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. The company has complied with the requisite requirements after the date of suspension but failed to pay the applicable fine. State the procedure to be followed by the recognised stock exchange for revoking the suspension of trading of its shares. Also state the consequences for failing to pay the applicable fine by the company. (Dec 2020, 5 marks)
Answer:
If the non-compliant listed entity complies with the Requisite requirement(s) after the date of suspension and pays the applicable fine, the recognized stock exchange(s) shall revoke the suspension of trading of its shares by following the below procedure.
1. If the non-compliant listed entity complies with the aforesaid requirement(s) and pays the applicable fine after trading is suspended in the shares of the non-compliant entity, the recognized stock exchange(s) shall, on the date of compliance, give a public notice on its website informing compliance by the listed entity. The recognized stock exchange(s) shall revoke the suspension of trading of its shares after a period of 7 days from the date of such notice.
While issuing the said notice, the recognized stock exchange(s) shall send intimation of notice to other recognized stock exchange(s) where the shares of the entity are listed. After revocation of suspension, the trading of shares shall be permitted only in Trade for Trade’ basis for a period of 7 days from the date of revocation and thereafter, trading in the shares of the entity shall be shifted back to the normal trading category.
2. The recognized stock exchange(s) shall intimate the depositories to unfreeze the entire shareholding of the promoter and promoter group in such entity as well as all other securities held in the demat account of the promoter and promoter group, after three months from the date of revocation of the suspension.
The consequence for failing to pay applicable fine by the Company
If the non-compliant. listed entity fails to comply with the aforesaid requirement(s)or fails to pay the applicable fine within 6 months from the date of suspension, the recognized stock exchange(s) shall initiate the process of compulsory delisting of the non-compliant listed entity in accordance with the provisions of the Securities Contracts (Regulation) Act,
1956, the Securities Contracts (Regulation) Rules, 1957 and the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 as amended from time to time.
Question 8.
Write a short on “Compoundable and Non-Compoundable Offences”
Answer:
Compoundable and Non-Compoundable Offences
| Compoundable Offence | Non-Compoundable Offence |
Offence punishable with:
|
Offence punishabld with:
|
Question 9.
Define the Compounding of offence and its effect of the compounding.
Answer:
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 represents the concept of Compounding as a Settlement Mechanism, a settlement by paying the penalty in lieu of facing the prosecution for the offence committed. The meaning of word compounding of offence is not defined under Companies Act, 2013, or any other previous company law. However, if the provisions allowing compounding of offences under the company law are analyzed, it provide clear inference that it is nothing but admission of guilt” In the process of compounding, the person may either Suo-moto or on receipt of notice of default / initiation of prosecution, admits the commission of default and make an application for compounding of the concern offence. The defaulters agree to pay penalty/fine which may be ordered by the Central Government or Tribunal. Compounding is essentially a compromise or arrangement between administrator of the enactment and person committing an offence. Compounding crime consists of receipt of some consideration (termed as compounding fees) in return for an agreement not to prosecute one who has committed an offence.
Prosecution can be avoided by ‘compounding the offence’, either before or after the institution of the prosecution. “To compound” means “to settle a matter by a money payment, in iieu of other liability”. In short, compounding of an offence is a settlement mechanism, by which one is given an option to pay money in lieu of his prosecution, thereby avoiding a prolonged litigation.
Effects of Compounding
- If the offence is compounded before the institution of prosecution, the prosecution cannot be launched against the person by the Registrar ori by any shareholder of the company or by any person authorized by the Central Government in relation to the offence which has been compounded.
- If the offence is compounded after the institution of prosecution, such compounding shall be brought by the Registrar in writing, to the notice of the Court in which the prosecution is pending. Then the person shall be discharged.
Question 10.
Describe the penalty for failure to furnish information, return, etc. under the SEBI Act, 1992.
Answer:
Penalty for failure to furnish information, return, etc. under the SEBI Act, 1992
Section15A. If any person, who is required under SEBI Act or any rules or regulations made thereunder,
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be liable to a penalty which shall not be less than one iakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
(b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees;
(c) to maintain books of account or records, fails to maintain the same, he shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
Due Diligence-II Non Compliances, Penalties and Adjudications Notes
Compounding:
Compounding is nothing but admission of guilt and the Compoundable offences are not mandatorily punishable with imprisonment.
Compoundable Offence:
- Offences punishable with fine only.
- Offences punishable with fine or imprisonment.
- Offences punishable with fine or imprisonment or both.
- In such types of offences the punishment may or may not include imprisonment.
Non-compoundable Offence:
- Offences punishable with imprisonment only
- Offences punishable with both imprisonment and fine
- Any offence for which action is taken under Section 447, i.e., fraud, is non – compoundable, as the punishment therefore is fine and imprisonment
Reporting of the Non Compliance by the Company Secretaries:
For every professional, it is his duty to give report to the Board of the company on the Non-compliance found by him during the course of his audit assignments. The Company Secretary can primarily report on the non compliance through:
- Secretarial Audit Report
- Certification of Annual Return
- Internal Audit Reports
- Compliance& Due Diligence Report
Manner of Reporting of Non-Compliance:
- A qualification, reservation or adverse remarks, if any, should be stated by the Secretarial Auditor at the relevant places in his report in bold type or in italics.
- When the professional is not able to express an opinion on any matter, he should mention that he is unable to express an opinion on that matter and the reasons therefor.
- If the scope of work required to be performed is restricted on account of restrictions imposed by the company or on account of circumstantial limitations (like certain books or papers being in the custody of another person who is not available or a Government Authority), the Report should indicate such limitations.
- If such limitations are so material that the professional is unable to express any opinion, he should state that in the absence of necessary information and records, he is unable to report on compliance(s) relating to such areas by the Company.
- The professional may report with the Disclaimer of the fact and information.