Ministry of Corporate Affairs improves the ease of running a company

Over the past two years the government has moved to decriminalise key provisions and simplified statutory requirements in the Companies Act

The post of the secretary of the ministry of corporate affairs (MCA) has been vacant for close to two months, since Rajesh Verma moved on as secretary to the President of India in August (on August 19). Revenue Secretary Tarun Bajaj has been holding additional charge since then.
 

Despite the vacancy, MCA officials have reason to be pleased at how they have managed to improve the administration of company law, reduce the scope of criminal penalty and accelerate the time to set up companies or exit them. That most of these have happened in the Covid-19 period is noteworthy. The most important of them, however, is still some way off. It is about tightening the definition of fraud, so prosecutors will need to work hard to make the charge stick. 
 

Many of these have happened by cutting down the ad hoc powers of the 30-odd Registrar of Companies (RoC). These offices are essentially record-keeping units, supposed to ensure that any company, ranging from one-person companies to the corporate behemoths, comply with the statutory requirements under the Act. The MCA had realised over several years that this was not what was happening.
 

“We now ensure that whether you are in a village in India or in the US dealing with us, 13 numbers you need to form a company are available to you digitally”, said a key official of the ministry. 
 

These 13 numbers include the alphabet soup of company identities like Tax Account Number and Goods and Service Tax number and a bank account, labour-related ones such as Employees Provident Fund and Employees’ State Insurance and registration under the Shops and Establishment Act. The MCA claims no one needs to come to any of the RoCs to set up shop.

Instead their “Simplified Proforma for Incorporating Company electronically” works well for almost any type of company. The number of incorporations do seem to be bearing this out. In FY22, the number of companies registered was 1,67,000, a 33 per cent jump from FY21. “Till the end of August, we are already running at 20 per cent more than last year at the same time,” the official said. 
 

This has particularly benefitted the field of limited liability partnerships, or LLPs. From about 60,000 in FY18, their numbers have jumped to 2,80,000 in FY22. This is a field populated heavily by knowledge economy firms such as chartered accountants, architects and lawyers. It helps the government to track them (--compaines will be in MCA data base) better and it helps the firms to have an established corporate identity to compete with their moneyed competitors. 
 

As part of intervention in the sector, the definition of “small companies” under the Companies Act, 2013, has also been revised upwards. From a paid up capital limit of “not exceeding Rs 50 lakh” the numbers have risen to Rs 4 crore. The turnover upper limit has risen even more extensively from “not exceeding Rs 2 crore”, to Rs 40 crore. Of more salience to them is possibly the removal of the need to prepare a cash flow statement, filing an abridged annual return and critically not having to go in for a mandatory rotation of auditor. For many of these companies, the auditor is like their financial adviser and changing it (them) midstream was often regarded by them as catastrophic. 

The headline grabbing change is of course that of cutting down offences under the Companies Act, 2013, which were earlier treated as criminal ones. These provisions came in the wake of the Satyam meltdown saga from 2009 onwards. There was a public clamour for strict laws. So failure to maintain the books of accounts of the company at its registered office and its inspection thereof by any director, disposal of records or contravention of provisions relating to foreign companies, were all those that attracted imprisonment.
 

The amendments notified in February last year have mostly erased all offences except fraud from the ambit of criminal penalty (see table).

All of these have been made offences for which companies will need to pay a fine. The amounts have been ratcheted up but are sensible moves, since they take away the role a government officer can play in the life of a company.

Writing for the law blog Mondaq, authors Praneet Kaur and Richa Bhandari of Alaya Legal, note that “By providing civil liability for most offences, the Indian Companies Act has aligned itself to corporate law provisions prevailing in several other countries. Additionally, by eliminating imprisonment and only imposing fines for violations of laws pertaining to foreign corporations, it encourages the foreign companies to set up business in India”. 
 

This may be one of the reasons the number of registrations of companies has shot up. The MCA has pivoted around to make itself more focused on larger offences than tracking every possible misdemeanour. Those can be rectified by the adjudicating officers under the in-house adjudication. 
 

The stress clearly is on improving the capacity of the regulators to track the big misdemeanours rather than fill up the records with tiny infractions. The changes in the Chartered  Accountants Act made this year to bring in outsiders to decide on penalty for those erring was bitterly contested by the profession. But it has stayed. 
 

Predictably, this has attracted some criticism. “The moves to decriminalise several sections in the Companies Act are fine, but the scale of penalties which has been brought in are massive. Further, the compliance burden for 'small companies' have also gone up substantially with respect to enhanced disclosure requirements as per the new Schedule III requirements, said Rasik Makkar, partner of AKAR & Associates, a Delhi-based chartered accountancy firm. 

The MCA is likely to face similar stiff questions when it tries to revise the definition of fraud and other graver offences. So far it has shown it can make life easy for the corporations. It has to also show it can come down heavily on them when really necessary.