Crackdown on shell cos forces 1 in 3 registered firms to shut shop

A crackdown on shell companies, increased regulatory compliance and failure of companies to avail bank credit, and defaulting on loans are some of the reasons cited by accounting professionals for the closure of such a large number of companies.

Illustration: Dominic Xavier/Rediff.com

A third of the companies registered with the ministry of corporate affairs have shut down, with nearly half of them folding up in the past year.

Data from the MCA reveals that as of January 31, 2018, about 1.7 million companies were registered with the government.

Of these, 538,000, or about 32 per cent, had shut shop.

About 238,000 or 15 per cent of the total, had folded up in the past year.

This means one in seven firms shut down in the year.

On January 31, 2017, there were about 300,000 companies that had folded up, according to the MCA’s data.

Most of these companies had gone defunct under Section 248 of the Companies Act 2013.

This law allows the Registrar of Companies to strike off the name of a company for three reasons: It failed to start business within a year of its incorporation; the company does not have sufficient capital; and the company has not done any business for the two preceding financial years and has not applied to be classified as a dormant one.

Of the about 538,000 companies that had shut shop till the end of January this year, nearly 495,000 were in this category.

A crackdown on shell companies, increased regulatory compliance and failure of companies to avail bank credit, and defaulting on loans are some of the reasons cited by accounting professionals for the closure of such a large number of companies in the span of a year.

“These companies are mostly defunct as they have not complied with regulations for the last three or four years. With the new companies law the compliance norms have been made stringent.

"Often the companies also do not want to disclose a lot of information,” said Mamta Binanai, a resolution professional and company secretary.

“Many of the firms might be in the non-performing asset category. Also, due to a crackdown on shell companies, a large number of these have ceased to exist,” she added.

Over the last few months, several functional companies have also been referred to the National Company Law Tribunal (NCLT).

“A number of functional companies have also been labelled as defunct. For example, if there is a dispute among the promoters and they fail to submit data to the RoC, the company can be classified as defunct. In many cases, the NCLT is seeking details, leading to a defunct status.

"There has to be some mechanism to classify such companies,” said Mohit Chawla, a Chandigarh-based finance professional.

As of January 2018, there were about 1.15 million companies active in the country, against about 1.14 million as of January 2017.

A classification of active companies by economic activity reveals that the biggest chunk were in business services (346,498), followed by manufacturing (232,059), trading (151,843), and construction (104,359).

Business services comprise information technology, research and development, and other services such as law, auditing, accounts and consultancy.