Penalty to Public Company for reducing number of members from seven to six after Share Transfer

Penalty to Public Company for reducing number of members from seven to six after Share Transfer. MCA ROC Adjudication order for non compliance of section 3(1)(a) read with section 3a and section 10 of the companies act 2013
The Companies Act, 2013 was designed to regulate corporate functioning in India with clarity and accountability. Among its provisions are mandatory requirements for public companies, such as maintaining a minimum of seven members at all times. This requirement not only reflects the structure of a public company but also acts as a safeguard against concentration of ownership in very few hands.
Failure to comply with such basic requirements, whether by intent or oversight, attracts penalties under the Act. In this case, Kheria Autocomp Limited, a company registered in Gujarat, admitted that its membership fell below the minimum requirement of seven for a period of more than a year. The Registrar of Companies (ROC), Ahmedabad, initiated adjudication under Section 454, applying Section 450 to impose penalties on the company and its directors.
This case demonstrates the consequences of even technical lapses in compliance. Though the reduction in membership was temporary and later rectified, penalties were imposed to ensure accountability and highlight the continuing responsibility of directors. 
Facts of the Case
Kheria Autocomp Limited, bearing CIN U35923GJ2009PLC058554, is registered under the Companies Act and has its office at Tata Vendor Park, Northkotpura, Sanand, Gujarat. Its directors included Tara Chand Kheria (DIN 00165643), Vinay Kheria (DIN 00165718), Santosh Devi Kheria (DIN 02808460), and Sushma Kheria (DIN 02808465).
The company filed a suo motu application in Form GNL-1 on 5 March 2025, admitting that it had failed to maintain the minimum seven members in a public company during the period from 23 March 2023 to 30 November 2024. The lapse occurred because one shareholder, Tarachand Kheria HUF, transferred 2,46,900 shares to another existing shareholder, Vinay Kheria, in dematerialized mode. This transfer reduced the number of members from seven to six, thereby violating Section 3(1)(a) read with Section 3A and Section 10 of the Act.
The company stated that the error was caused inadvertently, due to oversight and unavoidable reasons. Upon realizing the default, corrective measures were taken and the membership was restored to seven with effect from 30 November 2024.
In compliance with Section 454(4), a hearing was scheduled on 9 July 2025. During the proceedings, the company argued that Director Vinay Kheria was the officer in default and had been declared responsible for compliance through Form GNL-3 filed earlier. However, the ROC found that this declaration was filed after the default period and therefore could not absolve the company or other directors of liability.
Issues Raised
The adjudication presented several issues for consideration:

Whether Kheria Autocomp Limited violated the provisions of Section 10 read with Sections 3 and 3A of the Companies Act, 2013 by failing to maintain the minimum of seven members required for a public company.

Whether filing of Form GNL-3, designating a single director as the officer responsible, could absolve other directors of liability for the default.

Whether the company’s subsequent rectification of the lapse, by restoring membership on 30 November 2024, could mitigate its liability for the earlier default.

What penalties were appropriate under Section 450 of the Act in light of the admitted contravention.

Penal Provision 
The following provisions of the Companies Act, 2013 were central to the case:

Section 3(1)(a): Provides that a public company must have a minimum of seven members.

Section 3A: States that if the number of members falls below the statutory minimum and the company continues business for more than six months, every member aware of this fact becomes personally liable for debts contracted during that period.

Section 10: Makes the memorandum and articles binding on the company and its members, requiring compliance with statutory provisions.

Section 450: Provides a general penalty clause. If no specific penalty is provided elsewhere, the company and every officer in default are liable to a penalty of Rs.10,000 and, in case of a continuing contravention, Rs.1,000 for each day after the first, subject to a maximum of Rs.2,00,000 for the company and Rs.50,000 for officers.

Section 454: Authorises adjudicating officers to impose penalties under the Act and outlines procedures for appeal.

Judgment 
After examining the submissions, the ROC rejected the argument that only Vinay Kheria should bear liability. Since Form GNL-3 declaring him as the officer in default had been filed after the period of violation, it did not exempt other directors. The responsibility of compliance extended to the entire board of directors during the default period.
The ROC observed that the company had indeed failed to maintain the minimum membership from 23 March 2023 to 30 November 2024, thereby violating Sections 3, 3A, and 10. Rectification after this period did not erase the contravention. Filing of a suo motu application admitted the default but could not prevent imposition of penalties.
Accordingly, the following penalties were imposed under Section 450:

On Kheria Autocomp Limited: Rs.2,00,000

On Tara Chand Kheria: Rs.50,000

On Vinay Kheria: Rs.50,000

On Santosh Devi Kheria: Rs.50,000

On Sushma Kheria: Rs.50,000

The order directed that penalties be paid within 90 days of receipt, through the Ministry of Corporate Affairs’ e-Adjudication facility. The directors were specifically instructed to pay the penalties from their personal income.
The ROC also stated that appeals could be filed before the Regional Director, Ahmedabad, within 60 days of the order, using Form ADJ and attaching a certified copy of the adjudication order. 
Societal Impact
The decision in this case conveys several lessons for companies and directors. First, it establishes that compliance with statutory requirements cannot be taken lightly, even when the lapse appears technical or unintentional. A public company must maintain at least seven members at all times, and failure to do so even if caused by a share transfer attracts liability.
Second, the case highlights that directors cannot shift responsibility to one individual. Even if one director is designated as the officer in default, such designation must be timely. Otherwise, all directors remain accountable. This strengthens the principle of collective responsibility in corporate governance.
Third, the decision stresses that rectification after default does not excuse liability for the period of contravention. Though the company eventually restored its membership, it was still penalized for the earlier lapse. This ensures that companies remain vigilant and proactive in preventing defaults, rather than relying on corrective measures later.
For shareholders and creditors, the decision provides reassurance. The requirement of seven members in a public company prevents concentration of power and ensures wider participation. By enforcing penalties, the law protects stakeholders from the risks associated with reduced membership.
Finally, the order spreads awareness among the corporate community that even inadvertent lapses, such as oversight in monitoring share transfers, can lead to penalties. It encourages companies to strengthen internal monitoring and compliance systems, ensuring that statutory requirements are met continuously.
Final Note of the Article
The ROC Ahmedabad’s adjudication against Kheria Autocomp Limited demonstrates the strict enforcement of compliance obligations under the Companies Act, 2013. The company’s failure to maintain the minimum of seven members for over a year, though unintentional and later rectified, attracted penalties under Section 450. Both the company and its directors were held accountable, with penalties ranging from Rs.50,000 for individuals to Rs.2,00,000 for the company.
The case reinforces the principle that compliance must be maintained continuously and not just restored after a lapse. It also underlines that directors, as custodians of governance, cannot escape liability by attributing responsibility to one individual after the fact.
By imposing penalties despite the eventual rectification, the order strengthens corporate discipline and assures stakeholders that statutory obligations will be enforced. This case serves as a reminder to all public companies that minimum membership is not a formality but a legal mandate, and directors must ensure constant compliance to avoid similar consequences. 
Download MCA Adjudication Order

MCA ROC Adjudication order for non compliance of section 3(1)(a) read with section 3a and section 10 of the companies act 2013

The Companies Act, 2013 was designed to regulate corporate functioning in India with clarity and accountability. Among its provisions are mandatory requirements for public companies, such as maintaining a minimum of seven members at all times. This requirement not only reflects the structure of a public company but also acts as a safeguard against concentration of ownership in very few hands.

Failure to comply with such basic requirements, whether by intent or oversight, attracts penalties under the Act. In this case, Kheria Autocomp Limited, a company registered in Gujarat, admitted that its membership fell below the minimum requirement of seven for a period of more than a year. The Registrar of Companies (ROC), Ahmedabad, initiated adjudication under Section 454, applying Section 450 to impose penalties on the company and its directors.

This case demonstrates the consequences of even technical lapses in compliance. Though the reduction in membership was temporary and later rectified, penalties were imposed to ensure accountability and highlight the continuing responsibility of directors.

Facts of the Case

Kheria Autocomp Limited, bearing CIN U35923GJ2009PLC058554, is registered under the Companies Act and has its office at Tata Vendor Park, Northkotpura, Sanand, Gujarat. Its directors included Tara Chand Kheria (DIN 00165643), Vinay Kheria (DIN 00165718), Santosh Devi Kheria (DIN 02808460), and Sushma Kheria (DIN 02808465).

The company filed a suo motu application in Form GNL-1 on 5 March 2025, admitting that it had failed to maintain the minimum seven members in a public company during the period from 23 March 2023 to 30 November 2024. The lapse occurred because one shareholder, Tarachand Kheria HUF, transferred 2,46,900 shares to another existing shareholder, Vinay Kheria, in dematerialized mode. This transfer reduced the number of members from seven to six, thereby violating Section 3(1)(a) read with Section 3A and Section 10 of the Act.

The company stated that the error was caused inadvertently, due to oversight and unavoidable reasons. Upon realizing the default, corrective measures were taken and the membership was restored to seven with effect from 30 November 2024.

In compliance with Section 454(4), a hearing was scheduled on 9 July 2025. During the proceedings, the company argued that Director Vinay Kheria was the officer in default and had been declared responsible for compliance through Form GNL-3 filed earlier. However, the ROC found that this declaration was filed after the default period and therefore could not absolve the company or other directors of liability.

Issues Raised

The adjudication presented several issues for consideration:

Whether Kheria Autocomp Limited violated the provisions of Section 10 read with Sections 3 and 3A of the Companies Act, 2013 by failing to maintain the minimum of seven members required for a public company.
Whether filing of Form GNL-3, designating a single director as the officer responsible, could absolve other directors of liability for the default.
Whether the company’s subsequent rectification of the lapse, by restoring membership on 30 November 2024, could mitigate its liability for the earlier default.
What penalties were appropriate under Section 450 of the Act in light of the admitted contravention.

Penal Provision

The following provisions of the Companies Act, 2013 were central to the case:

Section 3(1)(a): Provides that a public company must have a minimum of seven members.
Section 3A: States that if the number of members falls below the statutory minimum and the company continues business for more than six months, every member aware of this fact becomes personally liable for debts contracted during that period.
Section 10: Makes the memorandum and articles binding on the company and its members, requiring compliance with statutory provisions.
Section 450: Provides a general penalty clause. If no specific penalty is provided elsewhere, the company and every officer in default are liable to a penalty of Rs.10,000 and, in case of a continuing contravention, Rs.1,000 for each day after the first, subject to a maximum of Rs.2,00,000 for the company and Rs.50,000 for officers.
Section 454: Authorises adjudicating officers to impose penalties under the Act and outlines procedures for appeal.

Judgment

After examining the submissions, the ROC rejected the argument that only Vinay Kheria should bear liability. Since Form GNL-3 declaring him as the officer in default had been filed after the period of violation, it did not exempt other directors. The responsibility of compliance extended to the entire board of directors during the default period.

The ROC observed that the company had indeed failed to maintain the minimum membership from 23 March 2023 to 30 November 2024, thereby violating Sections 3, 3A, and 10. Rectification after this period did not erase the contravention. Filing of a suo motu application admitted the default but could not prevent imposition of penalties.

Accordingly, the following penalties were imposed under Section 450:

On Kheria Autocomp Limited: Rs.2,00,000
On Tara Chand Kheria: Rs.50,000
On Vinay Kheria: Rs.50,000
On Santosh Devi Kheria: Rs.50,000
On Sushma Kheria: Rs.50,000

The ROC also stated that appeals could be filed before the Regional Director, Ahmedabad, within 60 days of the order, using Form ADJ and attaching a certified copy of the adjudication order.

Societal Impact

The decision in this case conveys several lessons for companies and directors. First, it establishes that compliance with statutory requirements cannot be taken lightly, even when the lapse appears technical or unintentional. A public company must maintain at least seven members at all times, and failure to do so even if caused by a share transfer attracts liability.

Second, the case highlights that directors cannot shift responsibility to one individual. Even if one director is designated as the officer in default, such designation must be timely. Otherwise, all directors remain accountable. This strengthens the principle of collective responsibility in corporate governance.

Third, the decision stresses that rectification after default does not excuse liability for the period of contravention. Though the company eventually restored its membership, it was still penalized for the earlier lapse. This ensures that companies remain vigilant and proactive in preventing defaults, rather than relying on corrective measures later.

For shareholders and creditors, the decision provides reassurance. The requirement of seven members in a public company prevents concentration of power and ensures wider participation. By enforcing penalties, the law protects stakeholders from the risks associated with reduced membership.

Finally, the order spreads awareness among the corporate community that even inadvertent lapses, such as oversight in monitoring share transfers, can lead to penalties. It encourages companies to strengthen internal monitoring and compliance systems, ensuring that statutory requirements are met continuously.

Final Note of the Article

The ROC Ahmedabad’s adjudication against Kheria Autocomp Limited demonstrates the strict enforcement of compliance obligations under the Companies Act, 2013. The company’s failure to maintain the minimum of seven members for over a year, though unintentional and later rectified, attracted penalties under Section 450. Both the company and its directors were held accountable, with penalties ranging from Rs.50,000 for individuals to Rs.2,00,000 for the company.

The case reinforces the principle that compliance must be maintained continuously and not just restored after a lapse. It also underlines that directors, as custodians of governance, cannot escape liability by attributing responsibility to one individual after the fact.

By imposing penalties despite the eventual rectification, the order strengthens corporate discipline and assures stakeholders that statutory obligations will be enforced. This case serves as a reminder to all public companies that minimum membership is not a formality but a legal mandate, and directors must ensure constant compliance to avoid similar consequences.