The Other Half Of Decriminalization: How The Corporate Laws (Amendment) Bill, 2026 Seeks To Complete The Civil Penalty Framework With The Option Of Settlement, And Where It Falls Short

Every legislative reform carries within it the seeds of unintended consequences, and the Companies (Amendment) Acts of 2019 and 2020 were no exception. Civil penalties under the Companies Act, 2013 (“Companies Act”) were not a creature of those 2019 and 2020 amendments; they were already part of the Companies Act.

Then what did those amendments do? They significantly expand the civil penalty regime by converting a large category of criminal offences into civil penalty-based contraventions, specifically those the legislature characterised as technical and procedural, such as filing delays, intimation lapses, and record-keeping defaults. Offences considered serious in nature, carrying the potential for genuine harm to investors, creditors, or market integrity, were retained on the criminal track. The reform was celebrated as a landmark shift toward ease of doing business and, by decongesting the criminal courts of procedural infractions, largely achieved that objective.

The scale of that restructuring is best understood through the numbers:

What the numbers reveal, in aggregate, is that the 2019 and 2020 amendments considerably enlarged the civil penalty track. In doing so, however, the amendments entrenched the bifurcation of corporate non-compliances into two distinct enforcement roads: the criminal track, where offences punishable with “fine” or “fine and imprisonment” or “fine or imprisonment” continue to invite prosecution before Special Courts; and the significantly enlarged civil track, where the newly reclassified/decriminalized defaults joined the existing penalty-based contraventions under adjudication before the Registrar of Companies (“RoC”). The architecture appeared clean and purposeful, but the two roads were not equally equipped.

What went unnoticed was the compliance asymmetry quietly embedded in the statute. Criminal wrongs punishable with “fine” and “fine or imprisonment” remained compoundable under Section 441, meaning a company could voluntarily apply for compounding, tender a compounding/settlement fee, and obtain a discharge that extinguished both the pending prosecution and any prospect of future proceedings on the same facts. The civil penalty track under Section 454, by contrast, offered no equivalent settlement pathway. A company or its officer that discovered a historical procedural contravention had no statutory mechanism to secure a legally final closure through compounding or settlement.

The compounding gateway under Section 441 is expressly conditioned on the existence of an “offence punishable with fine” or “offence punishable with fine or imprisonment,” and the decriminalized civil contraventions, having been stripped of their criminal character, no longer satisfied that jurisdictional threshold. What remained was a punitive, unilateral adjudication machinery with no counterpart for compounding or settlement, leaving companies and their officers in a peculiar position: the more technical and procedural the default, the fewer statutory tools existed to resolve it.

It is worth acknowledging at the outset that the gap this article addresses does not reflect any deliberate regulatory design or a conscious choice to leave companies without recourse. The legislature pursued a legitimate and well-intentioned decriminalization objective, and the 2019 and 2020 amendments achieved much of what they intended. What the amendments did not carry through was a critical piece of the compliance architecture: a settlement pathway that would allow companies to proactively resolve a civil default on their own accord. The Corporate Laws (Amendment) Bill, 2026 (“Bill”), introduced in the Lok Sabha on 23 March 2026 and currently before a Joint Parliamentary Committee, proposes to correct and treat this omission through the introduction of a settlement mechanism under the proposed Section 454C.

The fix is not yet law, but the Bill’s introduction presents an important opportunity: not merely to enact the Bill as drafted, but to design it with the benefit of experience from frameworks that have operated settlement mechanisms for considerably longer, and to anticipate the full range of scenarios that companies across different stages of their lifecycle will encounter.

The Two Tracks and What Separated Them

Under Section 441, any offence punishable with a fine only, or with a fine or imprisonment, could be compounded either before or after the institution of prosecution. For defaults where the maximum prescribed fine did not exceed ₹25 lakhs, the Regional Director was the designated compounding authority. For higher-value defaults, the matter went before the National Company Law Tribunal (“NCLT”). Once the offence is compounded and the prescribed sum is paid, the statute gives the company or officer a practical quietus: where prosecution is pending, the court is informed, and the accused is discharged in relation to the compounded offence.

Section 454, by contrast, was designed as an in-house adjudication/enforcement mechanism. The Central Government designated officers of the Central Government not below the rank of RoC as Adjudicating Officers, empowered to issue Show Cause Notices upon detecting a civil contravention, evaluate the company’s/officer’s written reply, conduct hearings, and impose monetary penalties within the statutory range prescribed under the relevant provision. The entire machinery was premised on the regulator initiating the process rather than the defaulting company/officer doing so.

The structural incompatibility between these two mechanisms was not the product of any conscious legislative choice to treat civil penalty defaulters more harshly. Even at the time of the 2019 and 2020 amendments, when the civil penalty track was being considerably expanded, the legislature’s focus remained squarely on the decriminalization objective and the administrative efficiency of the adjudication mechanism. The question of whether the enlarged civil track needed its own settlement/compounding-like pathway to function equitably for companies seeking to proactively regularize their affairs appears to have gone unaddressed.

Civil penalty contraventions had existed under the Companies Act long before those amendments, and the adjudication mechanism under Section 454 had operated without a settlement track for years without attracting significant attention. It was only when the scale of decriminalization substantially enlarged the universe of civil defaults, and companies began encountering the practical consequences of having no voluntary settlement route, absence of such a mechanism became a recognised compliance problem rather than an incidental statutory gap.

Where the Absence of a Settlement Track Created Real Difficulty

The absence of a voluntary settlement mechanism for civil contraventions was not merely a theoretical imperfection. It manifested in concrete ways at different stages of a company’s lifecycle, and the problems it created were not uniform in their character. A company at the seed or startup stage encounters different compliance pressures than one preparing for a public issue or navigating an acquisition, but across all these stages, the inability to proactively resolve a civil default with statutory finality created a common thread of regulatory uncertainty that no informal workaround could adequately address.

The first problem arises in transaction due diligence in mergers, acquisitions, and private equity investments. When a buyer or investor conducts legal due diligence, historical compliance defaults surface in the RoC’s public registry and in the target company’s internal records. Delays in filing particulars of charges under Section 77, lapses in intimating changes in the registered office under Section 12, or failures to file annual returns under Section 92 are precisely the category of technical defaults that appear in such diligence and that buyers treat as matters requiring resolution before closing. Under the existing framework, the target company had no settlement/compounding mechanism to proactively regularize such defaults. It could not apply for compounding under Section 441 because these were no longer fine-based criminal offences, and the only available route was to wait for the RoC to issue a Show Cause Notice under Section 454 and proceed through adjudication, a timeline entirely outside the company’s control and frequently incompatible with the transaction schedule.

The second problem arises in pre-IPO compliance clean-up. A company preparing for a public issue is required to ensure that its regulatory and compliance record is clean before approaching the capital markets, given that regulatory defaults must be disclosed in the offer documents and are subject to scrutiny by SEBI and prospective investors in the course of due diligence. Unresolved civil defaults that remain pending adjudication create precisely the kind of disclosure uncertainty that the pre-IPO process cannot comfortably accommodate. A company in this position is left with no good option: it can either disclose the pending defaults as unresolved regulatory matters and invite the scrutiny and stumbling block that such a disclosure invites, or it can attempt to resolve them through the informal suo moto adjudication route discussed later in this piece, which offers no settlement-like closure. Neither path provides the solution that the capital markets process demands, and the absence of a settlement/compounding mechanism means that even a well-governed company with only technical historical lapses cannot fully resolve its position before stepping into the public domain.

The third problem concerns the personal exposure of directors and officers. Where a director/officer becomes aware of a subsisting civil default under the Companies Act, whether through an internal audit, a secretarial audit report, or a routine compliance review, the absence of a voluntary settlement mechanism means that the director has no statutory route to proactively close the matter. The default would continue to remain on record, leaving the director personally exposed to monetary penalties under the relevant provisions and, depending on the nature and duration of the default, to the possibility of disqualification under Section 164, notwithstanding the fact that the default arose purely from a technical or procedural lapse rather than any substantive non-compliance. The inability to settle such a contravention on the director’s/officer’s own motion, obtain a final order, and regularize the compliance record meant that a director who had identified the problem and genuinely wished to address it was no better positioned than one who had not, which directly undermined the proactive compliance incentive that the civil penalty regime was designed to foster.

These difficulties did not arise in the abstract; they surfaced precisely when Indian capital markets and M&A activity were witnessing sustained and record growth, with domestic IPO volumes and private equity deal flows reaching multi-year highs across 2023 and 2024. At the very moment when companies most needed clean compliance records, whether to satisfy investor due diligence, clear SEBI scrutiny, or meet transaction timelines, the civil penalty track offered them no mechanism to achieve closure. It would be difficult for any company that navigated a fundraising round, an acquisition, or a pre-IPO readiness exercise during this period to claim that the absence of a voluntary settlement pathway created no friction. The scale of market activity during these years ensured that the gap was not a niche concern confined to a handful of edge cases; it was a structural problem encountered across the breadth of Indian corporate practice.

The Economic Cost of Regulatory Uncertainty

The consequences of this gap extend beyond compliance inconvenience and carry tangible economic implications. Every unresolved regulatory default identified during a due diligence exercise increases transaction costs, prolongs negotiations, necessitates additional legal and compliance reviews, and often results in indemnity arrangements, escrow mechanisms, valuation adjustments, or conditional closing requirements. What may have originated as a technical procedural lapse can therefore evolve into a commercial impediment disproportionate to the nature of the underlying default.

The impact becomes even more pronounced in fundraising and public market transactions, where timelines are often critical and regulatory disclosures are subject to heightened scrutiny. In such situations, unresolved civil defaults create uncertainty not only for the company but also for investors, lenders, acquirers, and intermediaries involved in the transaction. A transparent and predictable settlement mechanism would therefore serve a broader economic purpose: reducing transaction friction, lowering compliance costs, improving certainty, and facilitating the efficient flow of capital within the corporate ecosystem.

The Workaround amid the Statutory Gap, and its Limitations

In practice, professionals developed a workaround for the above-stated problem. Companies began filing suo motu adjudication requests, often using Form GNL-1 as the available Ministry of Corporate Affairs (“MCA”) filing wrapper, admitting the default and requesting the RoC/adjudicating officer to pass an order under Section 454 so that the penalty could be quantified and paid. The introduction of the e-adjudication platform under Rule 3A of the Companies (Adjudication of Penalties) Rules, 2014, effective from 16 September 2024, provided the process with an operational structure by requiring that adjudication-related notices, replies, documents, hearings, orders, and penalty payments be submitted electronically.

That workaround had value, but it was not a settlement. Before the Bill, Section 454 did not expressly authorize a company to self-initiate adjudication; there was no dedicated statutory form for voluntary settlement, no guaranteed processing timeline, no formulaic settlement credit for self-reporting, and no non-appealable settlement order. Even where the RoC entertained the request, the result was still an adjudication order, not a settlement order.

The Bill recognises this problem, and its Clause 101 proposes to insert Section 454(1A), under which a company or its officer in default may make an application, in the prescribed form and manner and on payment of prescribed fees, for adjudication of penalty. The Notes on Clauses expressly state that this is to ensure that companies and officers in default may apply suo motu for adjudication of penalties.

Why a Settlement Mechanism Was Not Originally Introduced

It would, however, be simplistic to assume that the absence of a settlement mechanism under the civil penalty framework was entirely inadvertent. There are legitimate regulatory considerations that may explain why the legislature initially confined itself to decriminalization without simultaneously introducing a settlement route. A settlement mechanism, if designed without adequate safeguards, carries the risk of creating a perception that statutory compliance can be reduced to a monetary transaction, thereby weakening deterrence and encouraging a view that certain obligations under the Companies Act are merely optional so long as one is willing to pay a financial cost later. Further, regulators may reasonably be concerned that habitual or wilful defaulters could seek to misuse a settlement framework as a recurring escape route rather than as a genuine corrective measure.

It is therefore reasonable to conclude that the legislature was aware of the settlement frameworks already operating under FEMA and the SEBI Act at the time of the 2019 and 2020 amendments, but the choice not to introduce a similar mechanism for civil defaults under the Companies Act appears to have been deliberate, reflecting genuine regulatory caution. What the legislature could not fully anticipate, however, was the scale at which the decriminalisation exercise would enlarge the civil penalty universe, and the practical friction that the absence of a settlement route would generate once that enlarged universe collided with the compliance demands of a rapidly growing transaction and capital markets environment. What began as a considered regulatory choice quietly became an unintended consequence of the reform’s own success.

The Proposed Fix: What Bill Seeks to Do

Clause 103 of the Bill proposes to insert new Sections 454B, 454C, and 454D after Section 454A. Section 454C is the centrepiece of this restructuring and directly addresses the settlement gap in the civil penalty track.

The provision would enable any person against whom adjudication proceedings have been initiated under Section 454 to file a written settlement application before a Specified Authority constituted by the Central Government. The application must be filed before the Adjudicating Officer passes the penalty order, which means the settlement window is available only during the pendency of adjudication proceedings and closes the moment a penalty order is formally passed. Once the application is received, the Specified Authority would evaluate it by considering the nature, gravity, and impact of the contravention and, if satisfied, may accept the settlement on payment of a sum and on such terms as it considers appropriate, with both the quantum and the manner of implementation to be governed by rules yet to be prescribed by the Central Government.

The most consequential feature of proposed Section 454C is the finality provision in sub-section (8): no appeal shall lie against any order passed by the Specified Authority. This is the certainty that the informal suo moto adjudication route could never provide, and it is the feature that makes the Section 454C mechanism genuinely useful for the transactional and regulatory clean-up contexts described earlier. A company that resolves its civil default through this mechanism would receive a legally final settlement order that closes the matter entirely. Section 454C also excludes cases involving fraud under Section 447 and non-compoundable criminal offences, ensuring that the settlement track is calibrated for technical and procedural civil defaults and cannot be deployed as a shield against accountability for grave wrongdoings.

It is worth noting that in its present form, the Bill conditions access to the Settlement Route under Section 454C on proceedings having already been initiated; the provision does not envisage the filing of Suo Moto Settlement applications. The absence of a provision allowing suo moto settlement would mean that a company/officer which identifies a default and wishes to resolve it would as a workaround first file a voluntary application under Section 454(1A) i.e., informing RoC about the default and requesting to initiate adjudication, then wait for RoC to initiate adjudication proceedings on the basis of that application, and only then can apply for settlement under Section 454C.

This three-step sequencing is neither intuitive nor meaningful. If the legislature’s intent is to enable settlement, it is difficult to justify why a company/officer that has voluntarily identified a default and is willing to resolve it must still wait for adjudication proceedings to be initiated against it before it can opt for settlement.

The more purposeful solution, therefore, is to permit a company or officer to approach directly for settlement without requiring the initiation of adjudication proceedings as a prerequisite. Both the FEMA and SEBI frameworks have already demonstrated that this solution is workable. Under Section 15 of FEMA and the Foreign Exchange (Compounding Proceedings) Rules, 2024, a person may apply for compounding of a contravention that has not yet been the subject of any enforcement action. Under the SEBI (Settlement Proceedings) Regulations, 2018, a person may voluntarily approach SEBI for settlement even before formal proceedings are initiated against them, and the framework goes further by incentivising voluntary approaches through a twenty-five percent reduction in the settlement amount for applicants who opt for settlement before initiation of adjudication or other regulatory proceedings.

Both RBI and SEBI frameworks recognise a practical regulatory reality: no regulator can detect and pursue every contravention across the universe of regulated entities, and a settlement mechanism that rewards voluntary disclosure serves the dual purpose of encouraging proactive compliance while conserving regulatory resources for matters that genuinely warrant enforcement attention. The MCA is no different in this respect; rather, the universe of regulated entities under the MCA is more expansive than that under the RBI and SEBI, both in number and geographical spread. Therefore, Section 454C of the Bill, in its current form, may limit the practical reach and effectiveness of a mechanism that could otherwise deliver considerably greater benefit if the initiation of adjudication proceedings is not retained as a precondition for eligibility for settlement in the final enactment.

Designing the Framework: A Four-Tier Architecture

The effectiveness of Section 454C will ultimately depend not on the provision itself but on the architecture that governs its operation. In this context, it is worth considering how the rules might usefully be structured to provide clarity across the full spectrum of corporate defaults, rather than leaving eligibility and exclusions to be developed incrementally through practice and adjudication.

A workable framework might be conceived around four tiers:

The Fourth Tier is proposed by us with a specific purpose: to ensure that the settlement mechanism remains a genuine remedy and does not become a matter of right available to every defaulter, regardless of the nature or impact of the default. Settlement under Section 454C should be accessible only to those who have genuinely erred and seek to regularise their position in good faith, not to those who have caused material harm or acted with deliberate disregard for the law and seek to use settlement as an arbitrage against meaningful accountability.

Equally important is the predictability of the mechanism's application, particularly the basis on which settlement amounts will be determined. One possible approach would be to prescribe objective principles for determining settlement amounts, thereby reducing uncertainty and limiting excessive discretion. A framework could, for instance, provide greater concessions where a company voluntarily discloses a contravention before regulatory detection, lesser concessions where disclosure occurs after detection but before formal proceedings, and no concession where settlement is sought only after substantial regulatory action has commenced. Repeat violations within a specified period could attract enhanced settlement amounts, while contraventions involving investor harm, creditor prejudice, public interest concerns, or deliberate concealment could be excluded from the settlement framework, consistent with the Fourth Tier boundaries proposed above.

Such an approach would align incentives with regulatory objectives by rewarding proactive admission and resolution of defaults, preserving deterrence against repeated misconduct, and providing companies, directors, and regulators with a transparent and predictable framework for settlement decisions.

Designing the framework around this four-tier architecture from the outset, rather than allowing its boundaries to emerge gradually, would provide the structural clarity that companies, directors, and their advisors need when navigating compliance decisions across different stages of the corporate lifecycle. It would also give the regulator a principled basis for evaluating settlement applications consistently, reducing the risk of discretionary inconsistency under the Companies Act.

What the Bill Means in Practice and What Remains to Be Watched

The Corporate Laws (Amendment) Bill, 2026, proposes a structural shift in how civil defaults under the Companies Act can be resolved. If enacted, the proposed Section 454C would, for the first time, provide companies with a statutory, finally conclusive mechanism to settle civil penalty contraventions, addressing a gap that has created real compliance friction across the corporate lifecycle.

For the legislature and the Ministry of Corporate Affairs, the Bill’s introduction is not the finish line but the starting point. Three questions must be resolved before the mechanism can deliver on its promise.

The first concerns the settlement window itself. As presently drafted, the Bill conditions access to Section 454C on adjudication proceedings having already been initiated. This means a company that identifies a default and wishes to resolve it has no pathway to settlement until proceedings are first on foot. The framework should instead permit a company to approach the regulator voluntarily for settlement, before any proceedings are initiated, as both the FEMA and SEBI frameworks already provide. Requiring initiation as a precondition, in any form, forecloses the very voluntary compliance behaviour the mechanism is designed to encourage.

The second is whether the rules prescribing settlement amounts will introduce transparent, formula-based guidance calibrated to the nature and duration of the default, drawing on the experience of the SEBI and FEMA frameworks, or whether they will leave sufficient discretion to produce the kind of inconsistent outcomes that have historically undermined confidence in penalty-related processes under the Companies Act.

The third is whether the amendment will adopt a structured approach along the lines of the four-tier architecture discussed in this piece, providing clear and principled guidance on which defaults are eligible for settlement, and which are not, rather than leaving those boundaries to emerge through practice and adjudication after enactment.

The 2019 and 2020 amendments rightly removed the criminal stigma from technical and procedural corporate defaults. The Corporate Laws (Amendment) Bill, 2026, if enacted, would complete that project by equipping the civil penalty track with a settlement mechanism, the absence of which has been a source of considerable friction since the decriminalization wave of 2019 and 2020.

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