Don't miss the boat on regulatory compliance: ICC disclosure in board report, A MUST !
Recently the Ministry of Corporate Affairs ("MCA") imposed a penalty on a company in Bengaluru ("the Company") for violating Section 134(3)(q) of the Companies Act, 2013 ("Companies Act").
Section 134 of the Companies Act deals with financial statement, board reports, etc of a company. Sub-section (3) of Section 134 of the Companies Act provides the list of the matters/items that have to be included in a board report.
COMPANIES (ACCOUNTS) RULES, 2014 AMENDMENT
After the Sexual Harassment of Women at Workplace (Prevention, Prohibition, and Redressal) Act, 2013, ("POSH Act") came into applicability, vide notification dated 31/07/2018 the Government of India amended Rule 8(5) of the Companies (Accounts) Rules, 2014 and inserted sub-clause (x) which provides that a statement regarding compliance of the provisions relating to the constitution of Internal Complaints Committee ("ICC") under the POSH Act should be included in the board report.
PENALTIES UNDER COMPANIES ACT / POSH ACT
Penalty under POSH Act
The contravention of the provisions of POSH Act attracts a penalty of up to INR 50,000 (Indian Rupees Fifty Thousand) for the first time and subsequent contraventions can even lead to cancellation or withdrawal of the license or registration required for carrying on the business activity.
Penalty under Companies Act
If a company defaults in complying with the provisions of Section 134, the company is liable to a penalty of INR 300,000 (India Rupees Three Lakh). Furthermore, every officer of the company who is in default is liable to a penalty of INR 50,000 (Indian Rupees Fifty Thousand).
INQUIRY BY THE REGISTRAR OF COMPANIES, KARNATAKA ("ROC")
During an inquiry conducted by the ROC, it came to light that the Company had failed to disclose in its board report, covering the financial years ending on March 31, 2019, and March 31, 2020, regarding compliance of the provisions relating to the constitution of the ICC under the POSH Act as required under Section 134(3)(q) of the Companies Act, 2013.
This violation was brought to the attention of the Company through the preliminary findings letter by the Inspecting Officer and a subsequent show cause notice was issued on April 20, 2023, for the aforementioned violation. The Company submitted that as it had fewer than ten employees in each of its establishments, it was not obliged to constitute an ICC as per the POSH Act. The Company also submitted that no complaints from any female employees had been received by the Company to date, and the non-disclosure in the board's report was unintentional.
The ROC did not accept the submissions of the Company and imposed penalty on the Company and its officers amounting to INR 4,50,000 (Indian Rupees Four Lakh Fifty Thousand) for each financial year totalling to INR9,00,000 (Indian Rupees Nine Lakhs).
REGULATORY COMPLIANCE- MANDATORY
The penalty imposed on the Company serves as a reminder as to the significance of regulatory compliance for companies. The failure to include the required statement on any aspect as prescribed under the Companies Act will result in financial penalties for both the company and its key officers. Accordingly, companies need to be diligent about all aspects of compliance irrespective of how insignificant they may appear to be.
In the case at hand, assuming that the Company had less than 10 employees in its offices, to be compliant of the provisions of the Companies Act, the board report should have had a statement regarding non-constitution of ICC as the POSH Act was not applicable to the establishment of the Company.
It is essential for companies and their directors to comply with the Companies Act to avoid fines and legal action. Financial penalties levied by the MCA highlight the importance of taking statutory obligations seriously. Companies and their directors should be aware of their responsibilities and duties under the Companies Act to ensure that they comply with all regulations.
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