 "Decoding the mystery of falling company registrations")
'Make in India' and "ease of doing business" have been the key campaigns of Prime Minister Narendra Modi's government but according to official data on companies, aspiring entrepreneurs either seem to be reluctant to or are taking their sweet time to get their enterprises registered.
This is a trend over the past few financial years, not only the one since the new government came to power.
According to Ministry of Corporate Affairs data, the number of private and public companies registered in the last financial year (2014-15) has been the lowest in the past six years. Around 64,000 companies registered in 2014-15 compared to 98,029 the previous year - a drop of 35 per cent.
The reduction in registration of public companies has been more - from 3,105 in 2013-14 to 1,468 in 2015-16 - down around 52 per cent. When it comes to registering a private company, the drop has been around 33 per cent, from 94,924 in 2013-14 to 62,671 in 2015-16.
On the other hand, 12,348 limited liability partnerships (LLPs) were registered in the last financial year (till February, 2015) - showing a massive 55 per cent year-on-year (y-o-y) increase - reaching its highest level ever over the last six years. A far cry from 1,055 LLPs registered in 2009-10.
So, what is keeping entrepreneurs away from registering their businesses? Consultants and tax experts who guide and assist businesses to get registered say stricter compliance requirements as per companies act is making many of them wary. Companies Act, 2013 - which came into force from April 1, 2014 - has increased the compliance requirements for any public or private company. Businesses are concerned about issues around internal financial controls, mandatory auditor rotation, and stricter watch over related party transactions, among other things.
"The general perception among businesses is that there are too many compliance requirements now for listed or private companies," said a Delhi-based chartered account.
Another reason for the drop in number of registration in companies is sluggishness in the business environment. Consultants say that market conditions are also playing a part in entrepreneurs' reluctance to register their companies.
"Most entrepreneurs who enquire with us for processes and procedures required for starting a business take almost three months to kick start the process," said Lionel Charles, founder, indiafilings.com, which claims to register around 100 companies every month.
Clearly, entrepreneurs are taking their time to fine-tune their business model before taking the plunge. Many want to strengthen their business and customer contracts before registering their companies. "The situation would have been a lot different had there been an upswing in economy," added Charles.
With the business sentiments not showing signs of improvement in the near future, the situation is likely to remain the same, feel many consultants.
One key reason why LLPs are gaining traction among entrepreneurs is that compliance requirements and start-up costs are less, as compared to a private limited company, said Hrishikesh Datar, founder, vakilsearch.com. "This makes an LLP cost-effective, flexible and less time-consuming than a private limited company," he added.
LLP is a separate legal entity which is liable to the full extent of its assets. However, liability of the partners is limited to their agreed contribution in an LLP.
"There are also some tax advantages for LLPs. However more stringent compliance requirements placed on private limited companies give it greater credibility," said Datar.
The fees to incorporate an LLP is almost half of what is required for a private company registration. Moreover, if an LLP's turnover is less than Rs 40 lakh, it does not have to submit a verified balance sheet with Registrar of Companies (RoC).
"The process for incorporation of LLP involves fewer documents and is less cumbersome. So many professionals are opting to do a LLP incorporation for their clients instead of company incorporation," added Charles.
It is not that the government is not aware of the issues around registration of companies. The recent decision to combine six forms into just one - which were required to be filled for company registration - is a step in simplifying the process of registration.
The Parliamentary Standing Committee on Finance, too, has taken note of the downward trend in registration of companies. The government in its defence has said the drop in numbers is due to restriction in number of shell companies floated by business. However the Standing Committee has asked the government to 'make an enquiry into such negative trends and not merely brush it aside as uncorroborated evidence'. Only time will tell if the government will heed the Committee's advice.
This is a trend over the past few financial years, not only the one since the new government came to power.
According to Ministry of Corporate Affairs data, the number of private and public companies registered in the last financial year (2014-15) has been the lowest in the past six years. Around 64,000 companies registered in 2014-15 compared to 98,029 the previous year - a drop of 35 per cent.
The reduction in registration of public companies has been more - from 3,105 in 2013-14 to 1,468 in 2015-16 - down around 52 per cent. When it comes to registering a private company, the drop has been around 33 per cent, from 94,924 in 2013-14 to 62,671 in 2015-16.
On the other hand, 12,348 limited liability partnerships (LLPs) were registered in the last financial year (till February, 2015) - showing a massive 55 per cent year-on-year (y-o-y) increase - reaching its highest level ever over the last six years. A far cry from 1,055 LLPs registered in 2009-10.
So, what is keeping entrepreneurs away from registering their businesses? Consultants and tax experts who guide and assist businesses to get registered say stricter compliance requirements as per companies act is making many of them wary. Companies Act, 2013 - which came into force from April 1, 2014 - has increased the compliance requirements for any public or private company. Businesses are concerned about issues around internal financial controls, mandatory auditor rotation, and stricter watch over related party transactions, among other things.
"The general perception among businesses is that there are too many compliance requirements now for listed or private companies," said a Delhi-based chartered account.
Another reason for the drop in number of registration in companies is sluggishness in the business environment. Consultants say that market conditions are also playing a part in entrepreneurs' reluctance to register their companies.
"Most entrepreneurs who enquire with us for processes and procedures required for starting a business take almost three months to kick start the process," said Lionel Charles, founder, indiafilings.com, which claims to register around 100 companies every month.
Clearly, entrepreneurs are taking their time to fine-tune their business model before taking the plunge. Many want to strengthen their business and customer contracts before registering their companies. "The situation would have been a lot different had there been an upswing in economy," added Charles.
With the business sentiments not showing signs of improvement in the near future, the situation is likely to remain the same, feel many consultants.
One key reason why LLPs are gaining traction among entrepreneurs is that compliance requirements and start-up costs are less, as compared to a private limited company, said Hrishikesh Datar, founder, vakilsearch.com. "This makes an LLP cost-effective, flexible and less time-consuming than a private limited company," he added.
LLP is a separate legal entity which is liable to the full extent of its assets. However, liability of the partners is limited to their agreed contribution in an LLP.
"There are also some tax advantages for LLPs. However more stringent compliance requirements placed on private limited companies give it greater credibility," said Datar.
The fees to incorporate an LLP is almost half of what is required for a private company registration. Moreover, if an LLP's turnover is less than Rs 40 lakh, it does not have to submit a verified balance sheet with Registrar of Companies (RoC).
"The process for incorporation of LLP involves fewer documents and is less cumbersome. So many professionals are opting to do a LLP incorporation for their clients instead of company incorporation," added Charles.
It is not that the government is not aware of the issues around registration of companies. The recent decision to combine six forms into just one - which were required to be filled for company registration - is a step in simplifying the process of registration.
The Parliamentary Standing Committee on Finance, too, has taken note of the downward trend in registration of companies. The government in its defence has said the drop in numbers is due to restriction in number of shell companies floated by business. However the Standing Committee has asked the government to 'make an enquiry into such negative trends and not merely brush it aside as uncorroborated evidence'. Only time will tell if the government will heed the Committee's advice.