"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.
- 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.
- 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.
- 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
In addition to the above, MCA has created a category of 'companies under alert' on its website. This specific category encompasses following sub-categories:
- MLM companies (Companies where complaints are received against companies engaged in MLM/Chit fund activities);
- Vanishing companies (List of vanishing companies);
- Disqualified directors (list of disqualified directors who are not eligible to be appointed as a director);
- Year-wise list of defaulter companies (List of companies defaulted in filing annual filings financial statements and annual return);
- Defaulter directors and defaulter secretaries (Directors associated with defaulter companies);
- Dormant companies (List of companies which failed to file annual filings for last 3 years);
- Companies and LLP's under the process of striking-off.
- 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.
- 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.
- 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.
- '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:
- Preparation of a comprehensive digital database of shell companies and their associates as identified by various law enforcement agencies;
- 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;
- 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;
- 30 cases against 201 shell companies registered by the CBI and 17 cases where charge- sheets have been filed;
- Removal of 1, 62,618 companies by the RoC under section 248 of the CA, 2013.
- 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.
- 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.
- 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.
- 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.
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