The Ministry of Corporate Affairs (MCA) has relaxed norms for classification of ‘vanishing companies’. Under a key revision, an entity cannot be identified as ‘vanishing company’ if any of its directors — executive or non-executive — can be traced.
Earlier, if the managing director or any of the whole-time directors could not be traced, the company was termed as vanishing.
An MCA sources close to the development said the criteria had been reworked and registrar of companies (RoC) in the states were directed to identify such companies and start legal proceedings against them. The trigger for this exercise, the sources added, was a missive from the market regulator Securities and Exchange Board of India (Sebi). “It is in the interest of small investors that Sebi and MCA have jointly started this exercise,” said one of the sources.
They, however, voiced concern that the development was contrary to the suggestions from regulators and investigative bodies, which had suggested tightening of norms following the multi-crore Satyam fraud.
The relaxation of the criteria brought down the number of vanishing companies to 15-20 in the financial capital, Mumbai. It was expected to go up to 250-300 with strict norms.
Sources said: “The number of vanishing companies in the country may not even touch 100 now, which was expected to be around 500. Most of the companies have prominent personalities or professionals from other fields as non-executive directors, who can be traced easily.”
They added that since these directors did not have much say in the day-to-day affairs by virtue of not being full-time directors, it would not be fair to hold them accountable and, thus, there was no point in tracing them and let go of a company as “not vanishing”.
A listed company, which raised money through initial public offer and, thereafter, stopped operations, did not file returns either with the RoC or Sebi, and did not exist on the registered premises was termed as vanishing, or a fly-by-night operator.
Under the other revised norms, a company could be classified as vanishing if it does not file returns for two years. Earlier, the limit was three years.
Once classified as vanishing, the RoC could file police complaints and start criminal proceedings against the company under various sections of Indian Penal Code. “With the help of the police, it is easy to trace the directors and then unearth the funds to return to investors. Without a criminal case, recovery of funds is difficult since property cannot be attached,” said a ministry source.
All RoCs have been asked to complete the exercise of finding the vanishing companies after which a list will be prepared for approval by the Committee for Monitoring and Co-ordination, a high-powered panel of MCA and Sebi. Once approved, criminal proceedings could be initiated against them.
