Registrar's Power to Inspect Books: Section 206

The Registrar's power to inspect books sits in section 206 of the Companies Act, 2013, and it works in stages. A written notice for information comes first. A second, reasoned notice for the books themselves comes next. An inquiry into a suspected fraudulent or unlawful business comes third, and only after that does anyone reach the investigation machinery in the rest of Chapter XIV.

What triggers the Registrar's power to inspect books?

The Registrar's power to inspect books starts from something already on his desk. Sub-section (1) opens where on a scrutiny of any document filed by a company or on any information received by him, the Registrar is of the opinion that any further information or explanation or any further documents relating to the company is necessary. Two sources, then: a filed document he has read, or information that reached him.

What he may do at that point is narrow. He may by a written notice require the company to furnish in writing such information or explanation, or to produce such documents, within such reasonable time, as may be specified in the notice. Nobody visits the registered office at this stage.

Sub-section (2) puts the answering duty on the company and of its officers concerned, who must furnish the information or explanation to the best of their knowledge and power. Its proviso reaches backwards: where the information relates to any past period, the officers who had been in the employment of the company for such period, if called upon by a written notice served on them, shall also furnish such information or explanation to the best of their knowledge. A former officer is inside section 206 for the period he was there.

What are the three stages of section 206?

Stage one is the information notice under sub-section (1). Information, an explanation or documents, in writing, within a stated reasonable time.

Stage two is the inspection notice under sub-section (3). It opens on three alternative findings: no answer came within the time specified, or the Registrar considers the answer furnished inadequate, or he is satisfied on a scrutiny of the documents that an unsatisfactory state of affairs exists in the company and does not disclose a full and fair statement of the information required. He may then by another written notice, call on the company to produce for his inspection such further books of account, books, papers and explanations as he may require at such place and at such time as he may specify in the notice.

That second notice carries a condition the first does not. Its proviso states that before any notice is served under this sub-section, the Registrar shall record his reasons in writing for issuing such notice. The reasons are a precondition, not a later justification.

Stage three is the inquiry under sub-section (4). The trigger is different in kind. The Registrar must be satisfied on the basis of information available with or furnished to him or on a representation made to him by any person that one of three things is true: the business of the company is being carried on for a fraudulent or unlawful purpose, or the business is not in compliance with the provisions of this Act, or the grievances of investors are not being addressed. He must first inform the company of the allegations made against it by a written order, then call for information on the matters specified in the order, and carry out such inquiry as he deems fit after providing the company a reasonable opportunity of being heard.

Two provisos ride on that. The Central Government may, if satisfied that the circumstances so warrant, direct the Registrar or an inspector appointed by it for the purpose to carry out the inquiry under this sub-section. And where the business has been or is being carried on for a fraudulent or unlawful purpose, every officer of the company who is in default shall be punishable for fraud in the manner as provided in section 447. That is a direct route from a registry inquiry into the fraud provision and its two-tier punishment.

Two further sub-sections widen who may inspect. Sub-section (5) lets the Central Government direct inspection of books and papers of a company by an inspector appointed by it for the purpose, and sub-section (6) lets it, by general or special order, authorise any statutory authority to carry out the inspection of books of account of a company or class of companies.

What does the Registrar get to do once inside the books?

Section 207 supplies the mechanics, and it is where the power stops being paper-based. Sub-section (1) makes it the duty of every director, officer or other employee of the company to produce all such documents and to render all assistance to the Registrar or inspector. Sub-section (2) lets the officer conducting the inspection make or cause to be made copies of books of account and other books and papers, or place or cause to be placed any marks of identification in such books in token of the inspection having been made.

Sub-section (3) is the substantive grant. Notwithstanding any other law in force or any contract to the contrary, the Registrar or inspector shall have all the powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit in respect of three matters: discovery and production of books of account and other documents, summoning and enforcing the attendance of persons and examining them on oath, and inspection of any books, registers and other documents of the company at any place. The identical three-item list reappears for inspectors in section 217(5), so an inspection and an investigation carry the same civil-court toolkit.

What are the penalties under sections 206 and 207?

The two sections punish different failures, and section 207 is much the heavier of them.

Section 206(7) reaches a failure to furnish or produce. The company and every officer of the company, who is in default shall be punishable with a fine which may extend to one lakh rupees and in the case of a continuing failure, with an additional fine which may extend to five hundred rupees for everyday after the first during which the failure continues. The consolidation prints "everyday" as one word inside that formula, which is worth knowing if you are quoting the daily limb.

Section 207(4) reaches disobedience of a direction, and it has a second limb that costs more than money. Under clause (i) the director or officer shall be punishable with imprisonment which may extend to one year and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees. Under clause (ii), a director or officer convicted under the section shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and shall be disqualified from holding an office in any company. Conviction vacates the seat by operation of the sub-section, without a separate order.

Where does an inspection go next?

Section 208 is the hinge between Chapter XIV's inspection half and its investigation half. The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206 and other books and papers of the company under section 207, submit a report in writing to the Central Government along with such documents, if any. The report may, if necessary, include a recommendation that further investigation into the affairs of the company is necessary giving his reasons in support.

That recommendation is the first-named entry route into the rest of the Chapter. A report of the Registrar or inspector under section 208 is clause (a) of the grounds for an investigation into the affairs of a company under section 210(1), and clause (a) again of the grounds on which the Central Government may assign a case to the Serious Fraud Investigation Office under section 212(1).

Three things to keep separate while reading the Registrar's power to inspect books. Inspection under sections 206 and 207 is the Registrar's own work and produces a section 208 report. Search and seizure under section 209 needs an order from the Special Court and is available only where the books are likely to be destroyed, mutilated, altered, falsified or secreted. And an investigation is ordered by the Central Government or the Tribunal, is run by inspectors, and ends in an inspector's report under section 223. The books the Registrar calls for are the ones section 128 requires a company to keep, so what counts as books of account sets the outer edge of what a section 206 notice can ask for.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.