Companies that fail to file key annual information should not be allowed to make other mandatory regulatory filings, the corporate affairs ministry has said in a proposal to discipline errant firms.
The proposal comes after the ministry found that many companies were filing only "event based" information under the ministry's e-governance database but were not submitting the statutory annual and financial audit reports. It has also decided to implicate key officials of companies company secretary and auditors by prohibiting them from signing any document for filing with the MCA-21 system, the government's electronic platform made mandatory five years ago.
The proposal would make the functioning of defaulters difficult and also compound their offences as they will not be able to meet regulatory requirements of submitting all necessary forms, allowing the ministry to take stronger action.
"The idea is certainly to bring more discipline into the process, "said a senior official in the ministry, which has sought suggestions to the proposal from its regional directors, registrar of companies and official liquidators.
PTC India Financial Services Ltd director Ashok Haldia said, "This (non filing) will make their liability more onerous.
"Some of the filings that will be stopped include application for giving loan, providing security or guarantee. Filing in respect of consolidation, division or increase in share capital or increase in number of members will also be not allowed. Defaulting firms will also not be able to apply for approval for change of name or conversion of a public company into a private company. These limitations will make it difficult for companies to interact with other stakeholders.
"Further, banks and others who are expected to see compliance before sanction or disbursement for other contractual arrangements would not proceed further and look to insist for compliance, "said Mr Haldia. Over 50% of companies that are required to file their annual reports and balance sheet do not do so, government data show. Defaulting companies face penal action under the Companies Act from the registrar of companies after a show cause notice is issued. As per provisions of the Companies Act, non-filing of annual accounts and annual returns makes the company and all its officers liable to a fine up to Rs 500 per day. The non-filing has frustrated ministry's attempt to create records of companies in electronic form that can be quickly accessed in suspected cases of money laundering and fraud. Electronic records enable appropriate software to mine data and provide early warning about sudden changes in the financials of a company that could suggest some manipulation.
The government had also announced an amnesty scheme-Company Law Settlement Scheme (CLSS) 2010-that allowed companies to update their filings by paying a 25% extra fee. Such companies were given immunity from further prosecution. Defunct companies were also provided an exit scheme-Easy Exit Scheme (EES) 2010-under which they could get their names struck off the Register of Companies after providing their up to date statement of accounts. Both the schemes failed.
"One can expect that most of the companies, at least those who have not defaulted intentionally, would fall in line, "said Chetan Desai of Haribhakti & Co, a leading audit and consulting firm.
The ministry has said it will also seek the help of stock market watchdog Sebi and the Reserve Bank of India in taking action against errant companies. The ministry has found that many listed companies were regular in filing their documents with the stock exchanges but were not submitting documents with the registrar of companies. The ministry's facility of electronic filing of documents is aimed at lowering compliance cost for companies and brings transparency in their affairs.
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