Erring firms convicted, but it's not mission accomplished for regulators

Majority of prosecutions for various violations successful for the first time in over a decade

Regulatory authorities have improved their record in bringing errant companies to task in recent times.

The conviction rate is at its highest in years, shows a Business Standard analysis of ministry of corporate affairs data, amid reports of a rejig in its approach to infractions. Around 5.3 per cent of cases decided upon resulted in convictions in 2018-19. The number increased to 53.6 percent in 2021-22 to touch a 14-year high.

The ministry is planning to free up resources at the Registrar of Companies (RoC), which is in charge of the registration, regulation and striking-off of companies, to focus on serious violations. It plans to automate documentation that companies file with the ministry.

The last time that the majority of cases, 61 per cent of them, ended in convictions was in 2007-08 as seen in chart 1.

 

But there may be more to the headline number.

Data shows that the number of convictions in 2021-22 (406) was lower than in 2018-19 (680). The cases decided fell to 757 in 2021-22 from 12,886 in 2018-19. Lower disposal during the pandemic improved the conviction rate. But that is not all. The number of cases the ministry is taking up for prosecution is declining. There were 17,080 prosecutions in 2007-08 and 2,103 in 2021-22. The number had fallen to 2,573 in 2018-19 even before the pandemic (chart 2).

 

The most common violation in 2021-22 was companies not holding annual general meetings (434 cases), likely due to Covid-19. There were 339 cases of companies not paying penalties and 272 for violation of Nidhi rules meant for entities that take deposits and lend money to their members. The top three violations accounted for around half of all prosecutions. Other important prosecutions were for financial statement and audit violations (166 cases) and not providing information or documentation (107 cases).

Not holding an annual general meeting invites a Rs 1 lakh penalty on a company and every officer involved in the violation, with an additional Rs 5,000 each for every day of default. Other major violations also invite similar penalties.

The government has indicated that it does not want to prosecute minor cases and it may withdraw those pending for long. The ministry’s annual report data shows nearly 35,000 pending cases as of 2021-22.

The RoC also looks into complaints that investors or members of the public make against companies. There were almost 50,000 such complaints at the end of 2018-19. The number increased to 60,000 in 2021-22. Mumbai has 10,010 pending complaints and Delhi has 5,140.

Kolkata tops the list with 25,941 (chart 3).