Penalty discretion under Companies law requires proportionality, separate certification, and no automatic multiplication against directors.

Section 39(5) of the Companies Act, 2013 is discussed as a penalty provision that does not create a fixed or minimum mandatory penalty; instead, adjudicating officers must apply proportionality factors such as the size of the company, nature of business, public injury, repetition of default, and gain or loss caused. The text also states that failure to separately certify the annexed list of allottees under Rule 12(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 remains a technical default despite substantial compliance through Form PAS-3. It further notes that penalties should not be mechanically multiplied against each director and must be calibrated to the nature of the breach.

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Issues: (i) whether Section 39(5) of the Companies Act, 2013 creates a fixed or minimum mandatory penalty, or requires adjudicatory discretion informed by the factors in the Penalty Rules; (ii) whether the absence of a separate certification of the annexed list of allottees under Rule 12(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, despite the affirmation clause in Form PAS-3, constituted a default attracting penalty; and (iii) whether the quantum of penalty imposed on each director, multiplied separately, was arbitrary and required interference.

Issue (i): whether Section 39(5) of the Companies Act, 2013 creates a fixed or minimum mandatory penalty, or requires adjudicatory discretion informed by the factors in the Penalty Rules.

Analysis: The penalty provision was read as identical in design to the cognate SEBI penalty provision that had been construed by the Supreme Court. The phrase "shall be liable to a penalty" followed by a per-day rate and an outer ceiling of "whichever is less" was held not to exclude adjudicatory discretion. Rule 3(12) of the Companies (Adjudication of Penalties) Rules, 2014 requires regard to the size of the company, nature of business, injury to public interest, nature and repetition of default, and gain or loss caused. Reading Section 39(5) as a rigid minimum or fixed penalty would make the provision arbitrary and constitutionally vulnerable, and Rule 3(13) could not displace a constitutionally valid construction of the parent statute.

Conclusion: Section 39(5) is not a fixed or minimum mandatory penalty provision, and the adjudicating officer must exercise discretion by applying the relevant proportionality factors.

Issue (ii): whether the absence of a separate certification of the annexed list of allottees under Rule 12(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, despite the affirmation clause in Form PAS-3, constituted a default attracting penalty.

Analysis: Rule 12(2) requires not only filing of the return of allotment in Form PAS-3 but also attachment of the list of allottees, certified by the signatory of the form as complete and correct. The affirmation clause in the form did amount to substantial compliance, but it did not extinguish the explicit statutory requirement of separate certification. The breach was therefore not eliminated, though on the facts it was a technical default lacking aggravating circumstances and deserving of a tempered penalty.

Conclusion: A default was made out, but it was a technical breach that did not justify the harsh quantum imposed.

Issue (iii): whether the quantum of penalty imposed on each director, multiplied separately, was arbitrary and required interference.

Analysis: The adjudicating order failed to address the factors mandated by Rule 3(12) and treated the penalty as both mandatory and mechanically multiplicative against each director. The judgment held that the statutory scheme does not justify automatic multiplication of the maximum penalty by the number of directors merely because no separate officer in default was designated. The proper approach was to treat the liability as joint and several and to calibrate the penalty to the nature of the default, which in the facts was not serious and involved no shown aggravation.

Conclusion: The penalty required interference and was reduced to a joint and several liability of Rs. 1 lakh for each violation.

Final Conclusion: The impugned penalty order was interfered with to the extent of its arbitrary quantification, while sustaining the finding that a penal default had occurred, and the matter was finally disposed of by substituting a substantially reduced joint and several penalty.

Ratio Decidendi: A penalty provision framed with the words "shall be liable to a penalty" and "whichever is less" does not, by itself, create a fixed or minimum mandatory penalty; the adjudicating authority must exercise discretion by considering the statutory mitigating and aggravating factors so that the penalty remains proportionate and constitutionally valid.

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