How MCA and Sebi are cleaning the corporate universe

RoCs de-register over 100,000 firms, Sebi lists 1,088 in defunct exchanges as vanishing companies

Two major regulators of the corporate sector -- the Union ministry of corporate affairs (MCA) and the Securities and Exchange Board of India (Sebi) -- have embarked on an ambitious process of cleaning their respective jurisdictions.

While the various registrars of companies (RoCs) under MCA have de-registered around 100,000 companies, Sebi has designated 1,088 entities in the defunct exchanges as 'vanishing companies' and referred these to the ministry for further processing.

The latter term is of 1990s vintage. Many that had made Initial Public Offers of equity (IPOs) vanished after raising money. After a public interest suit by Midas Touch Investors Association at the Allahabad High Court, the then department of corporate affairs, Sebi and key people in the government decided to devise a common strategy.

Accordingly, in March 1999, it was decided that a Coordination and Monitoring Committee (CMC), co-chaired by the corporate affairs secretary and the Sebi chief, would be set up to identify and monitor the state of affairs of 'vanishing companies' and to take appropriate action under the Companies Act and the Sebi Act. While the CMC would deal with policy-level issues, it had seven task forces under its umbrella. These groups were supposed to identify such companies on a regular basis and recommend remedial action to the committee.

The committee came up with three parameters for identifying such companies. One, those which had not complied with the listing or filing requirements of a stock exchange or RoCs, respectively, for two years. Two, where no correspondence had been received by the exchange from the company for a long while. Three, where no office of the company could be located at the registered office address given at the time of stock exchange inspection.

From a reply by junior finance and corporate affairs minister Arjun Ram Meghwal to the Lok Sabha last December, only 78 entities were declared 'vanishing companies' in all these years. The ministry had informed that while 238 companies were referred, 160 of these were eventually traced.

In 2012, then minister Sachin Pilot had informed Parliament that there were 87 vanishing companies. So, in about four years, the government managed to trace another nine of these 'vanished companies'. The government responses to such queries over the years had also suggested that the number had not increased because of process improvements such as the Companies (Amendment) Act, 2006, through which norms for incorporation were made stringent by introduction of Directors Identification Number (DIN), mandatory filing of all details of directors, etc. Sebi had also tightened the regulations to monitor end-use of funds raised from investors.

This sudden reference of over 1,000 companies to the vanishing list gives an impression that the CMC-led process has not been functioning as well as it should have. As a result, there has been severe under-reporting of 'vanishing companies' all these years. Many such had in turn become the playgrounds of money launderers, entry operators and other unscrupulous elements. It is good that the drive against undisclosed money, spearheaded by the prime minister himself, has brought needed focus on this forgotten mechanism. It is time to trace those task forces which also seem to have vanished and put these back on the task.