Registrar of Companies will get more teeth to pursue defaulters after it is passed in monsoon session by Parliament
Firms failing to file their annual returns with the Registrar of Companies (RoC) will be slapped with stringent penalties and the government will also fast-track liquidation of defunct companies under the new Companies Bill that is likely to be passed in the monsoon session of Parliament.
We are now entering a compliance era and the Companies Bill will provision for triggering show-cause notices to inactive companies and early liquidation of defunct companies, said a person close to the situation who did not wish to be named because the Bill was still pending approval. Besides, an in-house mechanism for imposing penalties on defaulting companies rather than referring cases to courts is on the cards.
While the exact nature of such penalties couldnt be ascertained, the new provisions are much more stringent. For instance, liquidating companies typically can take 10-12 years, usually after protracted litigation.
Under the current law, companies have to file statutory returns for the last three years and all permanent documentspertaining to initial capital, founding promoters and loans. The annual returns typically include updates on appointments of directors, shareholding pattern, capital structure and indebtedness as well as the years balance sheet.
The government has already ensured better monitoring of this activity by making it mandatory for companies to e-file their returns starting last year under what is dubbed as the MCA 21 initiative.
Presently, the Registrar of Companies has the powers to strike off the names of companies which got registered, but have not been pursuing the business and therefore, also, not filing returns, said Charan Jyot Singh Nanda, central council member of the Institute of Chartered Accountants of India.
The ministry of company affairs (MCA) is expecting a compliance level that has improved perceptibly ever since e-filing was introduced, to go up even further, once the new penalties come into place.
According to MCA data, the total number of balance-sheet returns filed in 2006-07 was 3.16 lakh compared with 2.21 lakh in the previous year, a 43% increase. In the same period, the number of companies registered with RoC and required to file returns went up to seven lakh from 6.3 lakh. The total number of e-filings by firms stands at 18.33 lakh.
Though there are eight lakh private and public companies in India, today not all of them are required to file returns. New companies are required to file their balance sheet and annual returns only after 18 months of existence, explained a senior MCA official, who also didnt want to be named.
E-filing, which has reduced the burden of RoC, who typically had to handle mammoth paper-based filings, has also helped it identify and differentiate between inactive companies and defunct companies.
Since RoC officials can now do a technical scrutiny of companies and inspect their books, under Section 209 of the Companies Act of 1956, using e-filings, they are able to classify companies as inactive or defunct in a timely manner.
Inactive firms are those registered with RoC and are largely family-owned enterprises, which for a host of reasons, have failed to start operations.
Defunct companies, on the other hand, are those that have public holdings and have raised large amounts from financial institutions, and while active, do not file returns. These are liable for liquidation and face penalties.
MCA has a three-step formula to address the compliance issue. It first imposes additional fees, which can go up to 10 times the filing fee. Since the maximum return filing fee is Rs500, additional fee can go up to Rs5,000, said the MCA official.
Then, either the Company Law Board or a regional director with the ministry can charge a compounding fee. Or the matter can be referred to courts for penalties and even prosecution. The penalty rate can be as high as Rs 500 per day.