Consequences of Non-Compliance

Compliance refers to the adherence to applicable laws, rules and regulations. Every company is required to conduct its business in a lawful and ethical manner, by complying with all the laws applicable to it, such as Central laws, State laws, and sector specific laws. Adherence to laws and regulations is mandatory, and any failure to do so could result in consequences such as penalty, fines or, in certain cases, imprisonment.

Compliance has gained importance, and is understood as being a critical foundation for responsible business conduct. Companies are increasingly adopting structured processes, such as maintaining proper checklists or investing in automated systems, to manage their compliance obligations effectively and in a timely manner. With growing regulatory oversight and stakeholders’ expectation, compliance is becoming a non-negotiable ask, and failure to often leads to serious consequences.

Why does non-compliance occur?

The most common reasons include:

Absence of a compliance culture – If delays, lapses or violations do not attract accountability of person(s), compliance gets short shrift.
Weak leadership – The Board and/or management fail to set the right tone, and establish that compliance is a non-negotiable ask.
Poor compliance practices – Compliance processes are often dependent on individuals, rather than on systems. Since compliance is a continuous activity, failure to update systems, and invest in compliance software or other specialised technologies, increases the risk of lapses, including delayed escalations in cases of non-compliance.

Who is impacted by non-compliance?

The impact of non- compliance extends beyond the company. While the company bears financial, operational and reputational consequences, individuals such as Board members, Key Managerial Personnel, and other management persons may face personal liability for compliance failures.

What is the impact of non-compliance?

The cost of non-compliance extends beyond monetary fines and penalties, and may pose significant risk to a company and its operations. Major consequences include:

Fines and penalties – Monetary fines and penalties are the most immediate consequence of non-compliance. The quantum depends on the nature and severity of the violation.
Legal proceedings – Regulatory authorities may initiate legal action against the company and individuals, such as Board member or Key Managerial Personnel or management persons, in addition to imposing fines on them. Such proceedings may continue for several years.
Imprisonment – In serious or exceptional cases, individuals involved may face imprisonment.
Adverse note by Regulators – Regulators are unlikely to favourably view a company with a history of non-compliance, potentially affecting approvals, permissions, and future regulatory engagements.
Audits and Regulatory scrutiny – Non-compliance can result in inspections, investigations, and special audits by Regulators. These are time consuming, operationally disruptive and costly.
Qualified audit reports – Companies with non-compliance are unlikely to receive clean reports from statutory and secretarial auditors. This could raise concerns among investors.
Loss of revenue or disruption of operations – Certain violations may result in temporary suspension of business activities, leading to revenue loss. Persistent or severe non-compliance may even result in a permanent shut down of business operations.
Business disruption – Compliance failures divert management attention, disrupting the normal course of business.
Reputation risk – Non-compliance poses a serious reputational risk. Penalties, litigations, adverse orders, or imprisonment can damage the brand value and erode stakeholders’ trust.
Board exits – Repeated or material non-compliance may lead to resignations of Directors, especially Independent Directors, who would not wish to be associated with non-compliant companies. This too would impact the company’s reputation adversely.
High attrition – A loss of reputation, owing to a weak compliance culture, often results in higher attrition rates.