Diluting or Strengthening the Regulations? The Issue of Due Dates and Extensions

BACKGROUND

We saw significant changes in the corporate regulatory environment in the past few months. To name two of them:

• June 6 saw the introduction of BEN-1, a form to be filed with the company by individuals holding beneficial interest of 25% or more, and individuals exercising significant influence or control.
• July 5^th saw the introduction of KYC-3 for Directors requiring all DIN holders to file a form with specific information which among others required the individual to authenticate their email ids and mobile numbers by receiving OTPs.

Both these regulatory measures were significant reforms introduced with the aim of preventing money laundering and promoting transparency in company administration thereby ushering in good corporate governance.

Despite its vital importance, in the both the cases, the initial due date for complying with these provisions were extended- in one case by a month and in another case indefinitely. This triggers a moot question -Are due date extensions a regulatory strengthening measure or do due date extensions dilute the regulatory environment?

ISSUE

In Indian corporate law, extension of due dates for compliance that have stiff penalties is more the norm, than an exception. Most years we see the due date for filing annual returns by companies extended, to the extent that this is seen as a routine feature and often planned for, leading to bunching up of returns around the due date resulting in the infrastructure limitations of the regulator being exposed.

In addition to penalizing the law-abiding citizen by getting them to defer their revenue generating activities and disclose their critical business details to their rivals earlier, back of envelop quantifications show that the penalties the State forego by extension of due dates run to thousands of crores.

In the case of KYC-3, when it was initially announced on July 5^th, August 31, 2018 was the due date for filing KYC-3 and a penalty of Rs.5000 was to be levied for filing this form after its due date. However, on August 21, i.e. 10 days before the due date for filing the form, this due date was extended to September 15^th without any payment of penalty. Further this date has been extended to October 5^th with payment of reduced penalty of Rs.500/-, i.e. 10% of the original penalty.

On September 16, reports from MCA indicate that 21 lakh DIN holders had not filed their KYC-3. At the initially mandated penalty of Rs.5000 for delayed filing, the nominal penalty foregone is Rs.1050 crores (21 lakhs x Rs.5000). Further, the cost incurred by the law-abiding citizens, who in this case number 12 lakhs who complied with the original mandate as specified, is ignored, if not taken for granted.

CONCEPT

A law is only as good as its enforcement. In law enforcement, the sanctity attached to due dates and penalties is an indicator of whether the regulatory environment is strengthened or diluted.

Discretion with the regulator for reducing penalties and extending due dates penalise the law-abiding citizens who take extra efforts to comply with law when it is announced, often at great cost to themselves and their business. Further, given that businesses are competitive, reducing penalties and extending due dates rewards the procrastinators, who get additional time to comply without paying the initially announced penalties and thereby penalizes the law-abiding citizen who dutifully complies and imposes a cost on their business for being compliant.

SUGGESTION

We believe ease of doing business is only the other side of the coin of having a strong regulatory mechanism for enforcing mandates. One cannot exist without the other. In a strong regulatory environment, law abiding citizens need to be rewarded for compliant behaviour and the errant elements penalized.  Extension of due dates and dilution of penalties reward the errant elements and punish the law-abiding citizens. To promote a stronger regulatory environment, we suggest that extension of due dates and dilution of penalties be done only after giving the reasons for the same which should include the following:

• Reason for deferment (could be anyone of the three below)
  1. Due to natural disasters (like Chennai floods, Kerala floods etc.)
  2. Due to the inability to provide infrastructure / forms
  3. Any other, specify
• Penalty foregone by the deferment

This will not only ensure that compliant behaviour is rewarded but also promote a stronger compliance environment thereby paving the way for lesser regulations and promoting ease of doing business.