New Companies Act: Save small, private companies from routine filing

The MCA should free the companies that are small or have below Rs5 crore paid up capital from the routine filings other than changes in directors and annual returns

There is a school of thought that very rightly laments “The Companies Act 2013 threads small aadmi and his companies with jack boots.”

The statistics from Ministry of Corporate Affairs (MCA) for 2011 put the number of companies registered in India at 11.63 lakh. About 24,682 or 2.12% out of these have paid up capitals between Rs2-Rs5 crore and 23,589 or 2.02% have capitals exceeding Rs5 crore leaving a whopping 95.84% of companies with capitals less than Rs5 crore or $1 million far, far below global standards. In India, stock exchange listed companies constitute only a miniscule 0.6% leaving behind 99.4% to be individuals or private companies running businesses essentially with their own capital or borrowings.

The small entities have hardly any credit support or easy access to bank funding. Banks’ lending for working capital and asset acquisitions cover themselves adequately with securities from all sides- the company signing demand promissory note, backing it with personal guarantees of directors and mortgage/ pledge of personal assets, shares held by the promoters and also insisting on treating unsecured loans from friends/ relatives as collaterals. All this virtually strips them of their corporate personality and treat them as proprietorships or partnerships with unlimited liabilities for recovery of dues. It is rightly put “Thus small companies carry on their businesses risking their own capital and where lenders contribute debt-capital the lender’s interest is more than covered beyond the corporate mask for securities both commercial and legal.” The lenders on insisting on directors’ personal guarantees give them unlimited and free access to all their personal belongings and thereby virtually strip them of their so-called limited liability under the corporate laws.

The Companies Act 2013 that was expected to simplify the provisions relating to private and one-person/ single person companies. But on the contrary, has in fact, amplified the controls both in depth and scale by expressly barring loans to the private company’s directors or relatives, not appointing relatives to offices or to enter into contracts without the prior consent of shareholders. A public company can convert itself into a private company only after the clearance of the tribunal. Though in theory, they are closely held with their Memorandum and Article of Association restricting transfers of shares, but now they are required to state reasons for refusal. The requirement of postal ballots is made applicable even for one and two man companies. This does away with the many privileges extended to private limited companies by the 1956 Act.

The corporate laws of the UK, US, Australia and Singapore virtually leave private companies free to manage their own internal affairs and make use of the Registry for filing of statutory information. In India, there are a plethora of statutory requirements that add extremely high compliance costs.

It is said that more than 30-40% of registered dormant companies that are technically defunct have simply stopped filing returns with the authorities. Even the procedure for striking off names of the companies that have not even commenced business or opened any bank account, require to undergo archaic rules which makes it impossible to get out. This results in leaving office of the Registrar of Companies (ROC) with an extremely large mass of dead wood. The MCA should free the companies that are small or have below Rs5 crore paid up capital from the routine filings other than changes in directors and annual returns. This responsibility should be cast on Chartered Accountants (CAs), Company Secretaries (CS) to file returns duly attested by them confirming compliances on self-governance regulation basis.

(Nagesh Kini is a Mumbai based chartered accountant turned activist.)

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