The latest missile from the Ministry of Corporate Affairs - amendment dated February 21 2019 to the Companies (Incorporation) Rules 2014

The latest missile from the Ministry of Corporate Affairs - amendment dated February 21 2019 to the Companies (Incorporation) Rules 2014, with effect from February 25 2019 targets companies which are infamously known as "shell companies" i.e., companies which do not have proper registered office, which have defaulted in filing annual returns etc, by introducing the e Form

ACTIVE (Active Company Tagging Identities and Verification) to be filed by every company incorporated on or before Dec 31 2017. This form which has to be filed such companies on before April 27 2019, requires them to furnish, inter alia, the particulars of the registered office of the companies .

Under the New companies Act 2013, ( the Act) for notifying the jurisdictional Registrar of Companies (RoC) on the particulars of Registered office of a company either at the time of incorporation or on changing, after incorporation, its registered office to another address, the law requires quite a number of documents, in proof of the existence of such address / genuineness of the situation of the registered office and the formal arrangement between the company and the owner of the premises for the use as registered office is situated, to be attached to the prescribed form to be filed with the RoC. However, under the 1956 Act there was no such documents required to be submitted and only the address of the registered office and the local police station under whose jurisdiction the location of the registered office falls were required to be furnished in the prescribed form filed with RoC. Therefore, in respect of those companies incorporated under the 1956 Act and which had not changed their registered office after the new Act came into force, MCA would not have the documents which were introduced under the new Act as mandatory documents to be filed

Objectives of the Aendmemnt

Since over the years, the number of fly by night companies and shell companies cheating the public and Revenue Authorities and those involved in a variety of economic offences / criminal acts in violation of spate of legislations, were on the increase, with a view to curb such practices, MCA is serious in targeting such companies and in this backdrop, its latest action in introducing a mechanism to weed out such unscrupulous entities is appreciated.

Flaws in the Scheme

However, the manner in which the particulars of registered office is sought to be collected raises many a question.

Let us consider the amended Rules which require

a.		the photograph of the registered office showing external building and inside office also showing therein at least one director /Key Managerial Personnel who has affixed his/her digital signature to the form, be attached to the Form
b.		the details of the situation of the registered office - latitude and longitude be furnished in the Form

While the rationale for ascertaining the details of geographical location of the premises is understood, the need for attaching the photograph of the external building, the inside office with one of the directors present there is inexplicable and lacks logic. For, for the purpose of providing the particulars of the registered office, companies simply state the name of the building without specifying the exact floor/ block/wing in the building or the specific number allotted to the actual area occupied by a company for its use as registered office . This is a common practice among corporates and not objected to by MCA so far. In fact the Eform 22 prescribed for notifying MCA on the particulars of registered office of a company requires companies to give details of all other companies having the same registered office address. Therefore in a city, say, like Mumbai where the same address ( meaning: the building) may be recognised in the records of MCA as the registered office of hundreds of companies, which may fall under various group companies, although among such groups there may not be any connection. Now ,in the Form ACTIVE filed by such companies, the geographic coordinates for all such hundreds of companies in the same building will be the same ,while those companies would have their registered offices in various different floor, wing, block etc. To the extent, it proves that there does exist a company ( indicating that it is not a fictitious address) but beyond that what does the MCA look for from the forms being filed by such companies

Take the next case : A person under the Act is allowed to be director in a maximum of 20 companies and assuming all such companies where he is a director are housed in the same premises, the same photograph of the same external building and the same inside office and the same director will be attached to the 20 Eforms that these companies file with MCA in compliance with the new requirement under the Act. In such a situation, what would MCA look for as contravention of the provisions of the Act.? MCA cannot find fault with the 20 companies using the same premises as their registered office - since as of now there is no prescription in the Act limiting or prohibiting the number of companies using the same premises as their registered office Again there is no stipulation under the Act as to the minimum space- floor area- that a company should have for being used as its registered office .

Therefore, in the above cases, when all companies in a mammoth building file the prescribed Form ACTIVE with MCA, the particulars of the same geographic coordinates are reported by hundreds of companies. Remember that, now MCA is not asking for the documents on ownership and the permission of the owner of the premises to be used as registered office of companies, to be attached for the Form ACTIVE . Then what purpose does the filing of the new form with MCA serve? Perhaps, those companies which had fraudulently given fictitious address for their registered offices and which cannot now file the Form ACTIVE -since the particulars of the geographic coordinates will not be available for an address that does not exist, may be detected upon their failure to file the Form .

The actual number of such fraudulent companies is very small, although the extent of their wrongdoings may be huge, and therefore to make every company in existence to file this Form may only crowd the server at MCA, besides the portal for fling the forms witnessing heavy traffic when so many companies take up filing the forms within the specified period.

Another flaw in the MCA's thinking, going by its prescription for ascertaining the particulars of registered office is that the companies which indulge in fraudulent activities operate only from their registered offices. The fact that the very purpose of taking up this cleaning exercise is to detect companies which do not have genuine registered offices, means that according to MCA, such companies operate to the detriment of the society from other locations

Suggestions

MCA could have, instead, co-ordinated with other Regulators such as SEBI, IRDA, RBI, Revenue Authorities and Banks and other investigative authorities and intelligence agencies, by linking the Corporate Identity Number allotted to companies, the Director Identification Number allotted to directors by MCA and the PAN of the companies allotted by the Revenue Dept and taking such link as the base ,and devised a better, more effective and a simple process to detect bogus companies

The efforts to weed out a minuscule no of fraudulent companies may cause a lot of inconvenience to the vast number of genuine companies and the result of such a painful exercise on the part of MCA whether would yield the desired results remains to be seen