India: Effect Of Demonetization On The Companies Act, 2013

Last Updated: 8 November 2017
Article by Shikha Rawal

"Demonetization", a topic that evoked interest of both the academicians and professionals alike. Each person in the country had a strong opinion and an inherent expectation about the way in which demonetization would cull out for the country. The goal of demonetization was to make the economy stronger and eliminate the unaccounted cash transactions. One exact year has passed since the demonization was brought into action by the Government on November 8, 2016. Let us see whether there has been any effective change brought about on account of demonetization or was it just a 'good publicity stunt' of the present government.

For the purposes of this article, only the steps undertaken by the various regulatory bodies under the Companies Act, 2013 (CA, 2013) as a natural consequence of demonetization are elaborated upon.

  1. Disclosure of demonetization transactions in balance sheet and audit report of the companies: As per the notification dated March 30, 2017, the Central Government amended Schedule III of the CA, 2013 to disclose details of Specified Bank Notes (SBN) held and transacted during the period from November 8, 2016 to December 30, 2016. For the purposes of this notification, the term 'Specified Bank Notes' would have the same meaning as in the notification of the Government of India, in the Ministry of Finance (MOF), Department of Economic Affairs number S.O. 3407(E), dated November 8, 2016. The additional disclosure mandated by the Government would promote greater transparency and help accelerate economic growth.
  2. Striking off names of the companies by the Registrar of Companies (RoC): A public notice in Form STK-5 is provided by the RoC, 11, 285 companies which have not carried on business or operation for a period of 2 (two) immediately preceding financial years and these companies having not applied for obtaining a status of dormant company under section 455 have been recommended by the RoC to be struck-off under section 248 of the CA, 2013. Taking such a drastic step would create the necessary fear and forewarn other companies to file the financial statements under the time prescribed in the CA, 2013.
  3. Cancellation of registration of companies: As per the statement released by the Ministry of Corporate Affairs (MCA), the registration of 2,09,032 defaulting companies has been cancelled. Further, the MOF has instructed banks to restrict operations via bank accounts of such defaulting companies or their authorized representatives.

    In addition to the above, MCA has created a category of 'companies under alert' on its website. This specific category encompasses following sub-categories:

    1. MLM companies (Companies where complaints are received against companies engaged in MLM/Chit fund activities);
    2. Vanishing companies (List of vanishing companies);
    3. Disqualified directors (list of disqualified directors who are not eligible to be appointed as a director);
    4. Year-wise list of defaulter companies (List of companies defaulted in filing annual filings financial statements and annual return);
    5. Defaulter directors and defaulter secretaries (Directors associated with defaulter companies);
    6. Dormant companies (List of companies which failed to file annual filings for last 3 years);
    7. Companies and LLP's under the process of striking-off.
  4. Disqualification of directors: As per the statement released by the MCA, 1,06,578 directors ualified from acting as directors under Section 164(2) (a) of the CA, 2013 as on September 12, 2017. Section 164 (2) (a) provides that a person shall not be eligible for appointment as a director if the said person has not filed the financial statements for a continuous period of 3 (three) financial years. The Government has requested RBI to freeze the accounts of the defaulting companies who have exceeded the time limit for filing financial statement and annual returns under CA, 2013. A list of all disqualified directors which have been disqualified under section 164(2) (a) has been uploaded on the MCA website for each state.
  5. Sharing of information available with other governmental agencies for further action and inquiry: Mechanism for sharing of information between various law enforcement agencies has been put in place under the Regional Economic Intelligence Council (REIC) and Central Economic Intelligence Bureau (CEIB) forums. MCA is analysing the data available with the RoC to identify the directors and the beneficial interest held by such directors under the garb of such shell companies. Complete profiles of directors such as their background, antecedents and their role in the operations/functioning of these companies are being compiled in collaboration with the enforcement agencies. The bank accounts of such defaulting companies is being closely observed for, if any money laundering activities are carried out under the veil by such companies.
  6. Prohibition of multi-layering of corporate structures: MCA vide its notification dated September 20, 2017 prescribed the Companies (Restriction on number of layers) Rules, 2017 (Restriction of Layers Rules). From the date of the commencement of Restriction of Layers Rules, no company other than a banking company, a systemically important non-banking financial company, an insurance company a government company (Exempted Companies) can have more than two layers of subsidiaries. For computing the number of layers under the Restriction of Layers Rules, one layer of one or more wholly owned subsidiaries is not be taken into account.

    Each company other than the Exempted Companies are required to disclose the number of layers of subsidiaries in excess of the layer in Form CRL-1 within a period of 150 days from the date of publication of the Restriction of Layers Rules. Such information would then be examined by the MOF to monitor the abuse of corporate structure via multi layering.
  7. 'Task Force on shell companies': A Task Force on shell companies' under the Joint Chairmanship of Revenue Secretary and Secretary, Ministry of Corporate Affairs was constituted on February 2017 for effectively tackling the malpractices undertaken by the shell companies. 5 (five) meetings of the task force have already taken place. Key findings of the meetings can be stated as under:

    1. Preparation of a comprehensive digital database of shell companies and their associates as identified by various law enforcement agencies;
    2. Filing of prosecution complaints in criminal courts in respect of non-genuine transactions where it has been detected that shell companies/entities have been used as conduits by beneficiaries;
    3. A nationwide search in 16 states conducted by the Enforcement Directorate in respect of shell companies and related professionals who were behind the creation and operation of these Companies;
    4. 30 cases against 201 shell companies registered by the CBI and 17 cases where charge- sheets have been filed;
    5. Removal of 1, 62,618 companies by the RoC under section 248 of the CA, 2013.
  8. Notifiability of section 212 of the CA, 2013: MCA has notified sub-section (8), (9) and (10) of section 212. Under this section, if a director, additional director or assistant director of Serious Frauds Investigation Office (SFIO) has on the basis of material in his possession reason to believe that any person is guilty of an offence punishable under this section then he may arrest the person and inform him the grounds for such arrest. The person arrested under this section is to be then presented to the Judicial Magistrate or a Metropolitan Magistrate, having jurisdiction.
  9. High-level committee constituted for revamping the disciplinary systems of professionals: The professionals such as the Chartered Accountants, Company Secretaries and Cost Accountants who have been associated with the defaulting companies and have been involved in illegal activities have been identified by the MCA. The consequent action to be taken by the professional institutes such as the Institute of Chartered Accountants of India (ICAI), Institute of Chartered Secretaries of India (ICSI) and the Institute of Cost Accountants of India (ICOAI) against such identified professionals is also being monitored.
  10. Constitution of a National Financial Regulation Authority (NFRA): NFRA is modelled on the lines of the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK. Both are examples of outside regulation and NFRA is constituted to achieve a similar purpose. Section 132 of the CA, 2013 provides for the constitution of an NFRA, an independent body to regulate matters relating to accounting and auditing standards in the CA, 2013. NFRA shall make recommendations to the Central Government on the formulation of the accounting and auditing policies and standards adopted by the companies, monitor and enforce the compliance of such standards, oversee the quality of service of professionals and suggest measures for improvement of quality of services and other related functions. This section has not yet been enforced and section 210-A of the erstwhile Companies Act, 1956 is still applicable.
  11. Dummy directors: While allotting a Director Identification Number (DIN), as a part of the registration process, identification proof such as PAN card / Aadhar card to be submitted. Further biometric technology is implemented to check for dummy directors, if any.

The initiatives implemented by the present Government seem to be a positive step towards good corporate governance, creating deterrent examples such as prohibition of multi-layered structures, disqualification of directors so as to reduce the non-compliance. In effect, this would enhance the 'ease of doing business' in India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.