March 2025
1. Introduction
The Companies Act, 2013 (“Act”) prescribes comprehensive compliance requirements for organizations. It categorizes violations as civil or criminal, subject to penalties or fines and/or imprisonment. Prior to 2018, most violations under the Act were criminal in nature, often resulting in onerous and severe penalties for even minor procedural lapses. Recognizing the need to create a more business-friendly environment, significant amendments were introduced in 2019 and 2020 to decriminalize several corporate offences. As a result, the Act now contains 124 penal provisions, out of which 58 non-compliances (previously 18) are classified as civil offences. The government has authorized the Registrar of Companies (“ROC”) to adjudicate such civil offences and impose penalties. There are 25 ROCs in India who oversee violations and enforce compliance within their jurisdictions. According to the Ministry of Corporate Affairs’ website, ROCs collectively issued about 950 adjudication orders for various non-compliances in FY 2025, clearly evidencing increase in regulatory oversight and enforcement activity in India. The total value of these penalties was about INR 890 million (about USD 10.34 million).[1]
This newsletter aims to examine recent selective adjudication orders which makes it incumbent upon organizations to give due attention to even the minutest aspects of compliance.
2. Adjudication framework under the Act
Section 454 of the Act allows ROC to impose penalties on companies, their officers in default or other persons, or direct relevant parties to rectify the default. Penalties imposed depend on the amounts prescribed in the statute subject to minimum and maximum figures and ROC may consider size and nature of the business, impact on public interest, frequency and severity of the default, and any disproportionate gain or loss caused due to the default. Section 446B of the Act provides relief to certain companies[2] by capping the penalties at half of the prescribed amount, subject to maximum of INR 200,000 (about USD 2,300) for companies and INR 100,000 (about USD 1,200) for individuals. Once ROC issues an order, it can be appealed before the concerned Regional Directors (“RDs”) within 60 days of the receipt of ROC order. RD’s decision is final and binding, as the Act does not provide for a second appeal to any judicial forum.
3. Key trends in recent ROC orders
During the current fiscal year, which ends on March 31, it has been an eye-opener to see the grounds on which ROC issued adjudication orders for various non-compliances, spanning minor administrative lapses and serious violations. These violations included failure to hold first board meeting within 30 days of incorporation or conduct at least 4 meetings per calendar year or maintain a 120-day gap between two meetings. Even lapses in the completion of statutory forms correctly, missing to populate directors’ identification number in the financial statements, delayed filing of statutory forms or even dummy registered office address were taken seriously. Fines were imposed on the company and directors ranging from INR 50,000 (about USD 600) to INR 270,000 (about USD 3,100) per defaulting year. This simply is a pointer that what was previously considered a small deviation from the statute has now caught the eye of the regulator and there is a clear pan India mandate to scrutinize the obligations and a company’s ability to comply, leading to a far greater emphasis on enforcement. Certain notable cases are discussed below where the proceedings demonstrate the message from the top – follow the law, or face consequences.
3.1 LinkedIn: In this case, the ROC NCT of Delhi and Haryana penalized LinkedIn India, its directors, and significant beneficial owners (“SBOs”) for violations under section 90 of the Act. This provision has garnered increasing scrutiny in recent years, requiring SBOs to disclose their ownership to the company. SBO is an individual who (a) directly or indirectly holds 10% or more of a company’s shareholding, voting or dividend rights, or (b) holds significant influence or control over the company, apart from direct holding. Section 90 and the SBO rules also require the companies to take steps to identify SBOs, notify members seeking detailed shareholding structure with SBO details, and file these disclosures with ROC.
In this instance, ROC discovered an inconsistency in the creation date of beneficial ownership of company’s 1 share in statutory filing and financial statements. Upon detailed inspection, they also found that the company had failed to declare its SBOs and consequently, issued a show-cause notice. The company defended itself by arguing that no individual held a majority stake in its ultimate holding company, Microsoft Corporation and, therefore, it had no SBOs. ROC conducted an in-depth investigation, examined company’s corporate structure, and reviewed documents, press releases, public statements and several websites to identify potential SBOs. ROC applied the “significant influence or control” test to determine who held the power to influence or control company decisions; ability to appoint majority directors and control the management, directly or indirectly through agreements or other means. Based on this, it concluded the CEOs of LinkedIn US and Microsoft have the right to exert significant influence and control over LinkedIn’s Indian operations. The ROC’s findings were based on three key points, viz., holding-subsidiary relationship, reporting channels and financial control. It noted while LinkedIn US did not own shares in the Indian entity, it was mentioned as the holding company in LinkedIn India’s financial statements. As the holding company, the US company had control over the board, there were 2 common directors in the two entities who were officers of the US corporation and, therefore, effectively under the control of the US CEO. The ROC also found majority directors in LinkedIn India were employees of Microsoft or LinkedIn US who ultimately reported to their respective CEOs. Finally, following Microsoft’s acquisition of the US entity the CEO of LinkedIn US reported to and came under the control of Microsoft’s CEO. For its finding on financial control, ROC relied on an Indian board resolution which authorized Microsoft’s CFO, Treasurer and Assistant Treasurer to operate the Indian bank accounts and concluded Microsoft employees and eventually the CEO exercised financial control over LinkedIn India. Accordingly, ROC identified CEOs of LinkedIn US and Microsoft as SBOs of LinkedIn India and imposed a cumulative penalty of INR 2.15 million (about USD 25,000) on LinkedIn India, its directors, and SBOs.
3.2 Clairvoyant India: ROC Pune penalized the company and its directors for non-compliance with corporate social responsibility obligations under section 135 of the Act. The section states that companies with a net worth of INR 5 billion (about USD 58 million) or more, turnover of INR 10 billion (about USD 116 million) or more, or net profit of INR 50 million (about USD 580,000) or more in the last financial year must form a CSR committee and spend at least 2% of average net profits from last 3 financial years on CSR activities. If a company fails to meet its CSR obligation, the unspent amount must be transferred to certain prescribed funds within 6 months from end of the financial year. The Companies (Amendment) Act, 2020 carved an exception on to companies whose CSR obligation does not exceed INR 5 million (about USD 58,000) from constituting a CSR committee.
In this case, the company’s net profit exceeded INR 50 million in FY 2020, triggering the obligation to form a CSR committee in FY 2021. However, the company failed to do so, did not spend the funds or transfer the unspent amount to the specified funds within the prescribed timeline. The company filed a suo-moto application with ROC informing about inadvertent non-compliance by its former directors stating that the CSR provisions were misinterpreted and net profit was calculated based on “profit after tax,” leading to the belief CSR obligations were not triggered. The company contended its CSR obligation was below INR 5 million and it fell within the 2020 exception. The ROC clarified the CSR amendment which came into effect on January 22, 2021, cannot be applied retrospectively. The company held several board meetings before this date, where CSR compliance requirements should have been addressed. As a result, the company was found to be in default and ROC imposed a penalty of INR 200,000 (about USD 2,300). The ROC also imposed a penalty of INR 1.79 million (about USD 20,800), which was double the unspent CSR obligation, for failing to transfer unspent amount to prescribed funds. Further, the defaulting directors were penalized with INR 89,311 (about USD 1,000) each.
3.3 Planify Capital: The company faced strict scrutiny from the ROC NCT of Delhi and Haryana for violating section 42, which governs private placements of securities. This provision limits offering securities to less than 200 persons in a year, and forbids public advertisements or use of distribution channels for promotion. In this case, ROC initiated a suo-moto inquiry, discovered the company operated a crowdfunding platform for start-ups and facilitated sale of unlisted companies’ shares, and issued a show-cause notice. Upon further investigation, it found that the company issued 453,530 shares to Planify Enterprises Private Limited, which then transferred these shares to 76 investors via company’s platform. The company argued that it allotted shares to a single entity and had no direct involvement in the secondary transactions. ROC asserted this initial allotment was a smokescreen to mask the real intention of selling shares publicly. It further ruled these transactions circumvented section 42 restrictions, as the platform acted as a distribution channel to publicise and sell its securities to wide pool of public investors. In total, the company raised INR 38.95 million (about USD 5 million) through these indirect transactions. Given the critical nature of fundraising compliance which directly impacts public funds and raises regulatory concerns, the ROC imposed a hefty penalty of INR 20 million (about USD 230,000) on the company and penalty of the same amount on a director, and INR 10 million each (about USD 115,000) on 3 other directors.
3.4 Premier Energies: ROC Hyderabad penalized the company and its directors for failing to meet the securities’ dematerialization requirements under section 29 of the Act and related rules. The provision mandates that securities of unlisted public companies must be held, issued and transferred only in dematerialized form. It also requires companies to dematerialize all securities held by its promoters, directors and key managerial personnel before issuing any new securities. In this matter, the company filed a suo-moto application with ROC admitting that it had issued and allotted securities without dematerializing the shares held by its promoters and directors. Furthermore, it approved and recorded transfers of physical securities. As a result, ROC levied a cumulative penalty of INR 430,000 (about USD 5,000) on the company and its officers. In light of this order, the government has now extended this mandatory dematerialization requirement to all private companies, except small[3] and government companies. Therefore, it is now incumbent on all kinds of companies to ensure their securities are now held in demat form.
Of course, the parties appealed to appropriate RDs having jurisdiction and in the current fiscal year, so far 125 orders have been passed. In some cases, they upheld the ROC orders or dismissed appeals, or even reduced penalties. But, despite the right to appeal what stands vivid is enforcement by the regulator is here to stay. Companies now need to focus on continuous improvement by going beyond the need to meet regulations.
4. Conclusion
In today’s fast-evolving regulatory environment, compliance is no longer just a box to tick but it is a tool which protects companies from hefty penalties and reputational damage, and is a must for the health of a company. The above orders demonstrate various compliance failures, and offer a critical lesson, even the smallest misstep can snowball into major consequences. Leaders need to stop focusing on following the rules to showcase achievements on paper. However, the regulators must strike the right balance. While the goal is to maintain fairness and transparency; however, at times, penalties for minor violations seem disproportionate to their nature and intent behind them. Companies must be given room to rectify minor and unintentional lapses, without facing severe penalties. Overly rigid enforcement may defeat the government’s efforts to simplify ease of doing business.
Author
[1] 1USD = INR 86 and rounded off
[2] These companies include one person company, small company, start-up company or producer company
[3] Private companies (excluding holding, subsidiary and section 8 companies) with paid-up share capital not exceeding INR 40 million (about USD 465,000) and turnover not exceeding INR 400 million (about USD 4,651,000)