Attack on shell firms: MCA issues notices to errant NBFCs

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In yet another attempt to crack the whip on shell companies, the Ministry of Corporate Affairs has issued notices to companies which were supposed to act as non-banking financial companies (NBFCs) but have not registered with the Reserve Bank of India (RBI).

The ministry has taken this action to seek an explanation from these companies on their businesses within 10 days, a source said

If companies are found to be in the non-banking financial activities such as lending, investment or deposit acceptance as their principal business, without the RBI registration, the central bank can impose a penalty or even prosecute them in a court of law.

A similar attempt was undertaken by the RBI a few years back. In 2013, the RBI had clamped down on unregistered NBFCs after the Saradha scam. The central bank undertook such an exercise even in 2014. The pan-India figure of such entities back then was around 70,000. The number of non-registered NBFCs has risen since then, an official said.

The Securities & Exchange Board of India (Sebi) had recently put 331 companies on heightened surveillance. It also delisted entities it suspected of being shell companies. The Centre, too, has frozen bank accounts of 200,000 companies after these were struck off by Registrar of Companies. The directors of these firms were also banned.

The Centre and its agencies are not only taking corrective action but are also initiating pre-emptive steps to check the menace of dormant companies. It is working with Sebi to get all public unlisted companies to issue shares online. Experts said this would ensure greater transparency in these companies and bring down litigation.

After demonetisation, a number of shell companies were found to be operating with the same address, not directly contributing to the mainstream economy. It was then that the government sprung into action.

An NBFC is a company registered under the Companies Act, 1956, engaged in the business of loans and advances among other functions. It is also a company which receives deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, as its principal business.

 

Source: Business Standard

Over 2.09 lakh firms struck off, bank accounts frozen: Govt

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In a major clampdown against black money, the government on Tuesday directed freezing bank accounts of more than 2.09 lakh companies whose names have been struck off from the records and said action would be taken against more such firms.

Banks have also been asked to step up their vigil against those companies that are non-compliant with various regulations and not carrying out business activities for long, a senior finance ministry official said as authorities continue their crackdown against shell entities The official said banks have been directed to freeze the bank accounts of these deregistered companies.

While warning that action would be taken against erring firms, the official said the efforts would help in enhancing corporate governance standards as well as clean up the system that otherwise is prone to be misused.

The names of over 2.09 lakh firms have been struck off from register of companies for failing to comply with regulatory requirements

“The names of 2,09,032 companies have been struck off from the register of companies under Section 248 (5) of the Act. The existing directors and authorised signatories of such struck-off companies will now become ex-directors or ex- authorised signatories,” an official release said

Section 248 of the Companies Act – which is implemented by the corporate affairs ministry – provides powers to strike off names of companies from the register on various grounds including for being inactive for long.

According to the official, since these companies had ceased to be legal entities, there was no reason having active bank accounts which could be prone to misuse.

Once these companies become compliant, banks would activate their accounts, the official added. “Furthering our war against #BlackMoney, banks have been advised to immediately restrict bank accounts of struck-off companies,” Minister of State for Corporate Affairs P P Chaudhary said in a tweet.

The official said a detailed analysis has been initiated to check whether these deregistered companies were used as conduits for channelising unaccounted money into the system, especially during demonetisation.

Amid efforts against shell companies which are allegedly used as conduits for illicit fund flows and tax evasion, the government said the directors of deregistered firms would not be able to operate the bank accounts till these entities are legally restored

About the directors and signatories of the over 2.09 lakh firms, the government said they would not be able to operate bank accounts of such companies till these entities are legally restored. The restoration, as and when it happens, would be reflected in the official records by way of change in the status from ‘struck off’ to ‘active’. “Since such ‘struck off’ companies have ceased to exist, action has been initiated to restrict the operation of bank accounts of such companies,” the release said.

The Department of Financial Services, through the Indian Banks Association, has advised banks that they should take immediate steps to put restrictions on bank accounts of such struck-off companies. “In addition to such struck-off companies, banks have also been advised to go in for enhanced diligence while dealing with companies in general,” the release said.

A company even having an active status on the corporate affairs ministry website but defaulting in filing of its due financial statements or annual returns, among others, “should be seen with suspicion as, prima facie, the company is not complying with its mandatory statutory obligations”. In another tweet, Chaudhary said the ministry is committed “in attaining @narendramodi ji’s vision of eliminating black money”.

Source:DD News

SEBI plans stricter norms for Independent Directors

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Markets watchdog Securities and Exchange Board of India (SEBI) plans to overhaul the regulatory framework for corporate governance, including appointment and removal of independent directors, people familiar with the matter said.

Besides, a high level panel is looking at corporate governance issues such as those pertaining to related party transactions, auditing and effectiveness of board evaluation practices, the people added.

Against the backdrop of recent instances of boardroom battles involving large corporates, the SEBI is looking to revamp the norms and the matter is expected to be discussed at its board meeting later this month.

Strengthening corporate governance practice is a focus area for the regulator, with SEBI chairman Ajay Tyagi recently saying, “independent directors are not independent”.

The regulator is keen on stricter norms for independent directors, including with respect to their appointment, removal and larger responsibility as part of a company’s board, the people said.

Currently, an independent director can be removed by way of an ordinary resolution — which requires the approval of at least 50 percent shareholders of a particular company.

However, when it comes to re-appointment of independent directors, the firm concerned has to move a special resolution under which nod from 75 percent or more shareholders is required.

According to sources, SEBI wants to make it special resolution mandatory for removal of an independent director as such a provision will reduce the arbitrariness of promoters in deciding upon the ouster of such directors.

Besides, stringent disclosure requirements for independent directors, including at the time of their appointments, are being looked at, sources said.

Corporate governance issues will be among the slew of developments that are to be discussed during the SEBI board meeting scheduled for June 21.

 

 

 

 

Earlier this month, the watchdog set up a 21-member committee under the chairmanship of veteran banker Uday Kotak to suggest ways to further improve corporate governance standards of listed companies.

The panel will make recommendations on ensuring independence in spirit of independent directors and their active participation in functioning of the company.

Besides, measures to address issues faced by investors on participation in general meetings and ways for improving effectiveness of board evaluation practices will be suggested by the committee.

Apart from Kotak, who is the chairman of Kotak Mahindra Bank, other members include HDFC CEO Keki Mistry, Wipro chief strategic officer Rishad Premji, L&T Whole Time Director R Shankar Raman and BSE CEO Ashishkumar Chauhan.

In April, Tyagi had said there were too many lacunae with respect to the concept of independent directors with many having “no commitment to any cause”.

“I must admit I have no solutions on what should be done but it will be anyone’s case that existing system has lot of lacunae,” he had said.

Some independent directors are appointed at the mercy of promoters “(with) no prescribed qualifications or procedures, favouritism, (many are from) closed clubs (such as) only those people being in all boards, no commitment to any cause – Ajay Tyagi, Chairman, SEBI

 

 

 

 

Earlier this year, the regulator came out with detailed corporate governance norms for listed companies that provide for stricter disclosures and protection of investor rights, including equitable treatment for minority and foreign shareholders.

The new rules, which would be effective from October 1, require companies to get shareholders’ approval for related party transactions, establish whistle blower mechanism, elaborate disclosures on pay packages and have at least one woman director on their boards.

Source: https://www.bloombergquint.com/law-and-policy/2017/06/12/market-regulator-sebi-plans-stricter-norms-for-independent-directors

Government prepares to strike off registration of over 2 lakh companies

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Defunct or Inactive Companies - Fast Track Exit Scheme / Strike off of companies under Companies Act, 2013
Defunct or Inactive Companies – Fast Track Exit Scheme / Strike off of companies under Companies Act, 2013

The government plans to cancel the registration of more than two lakh companies that have not been carrying out business for a considerable period of time, amid stepped up efforts to tackle the black money menace.

More than two lakh companies, spread across various states, have been served with show cause notices as they have not been carrying out any operation or business activity for a prolonged time.

The Corporate Affairs Ministry’s move also comes against the backdrop of overall efforts by the authorities to crack the whip on shell companies, suspected to be used for money laundering activities.

The Registrars of Companies (RoCs) in various states and union territories have issued notices to more than two lakh firms under the Companies Act, 2013, according to information available with the Ministry.

These notices have been issued under Section 248 of the Act, which is implemented by the Ministry. This section pertains to striking off names of companies on certain grounds.

With the issuance of notices, the companies concerned have to explain their position and if the responses are not satisfactory, then their names would be struck off by the Ministry.

Data showed that RoC Mumbai has issued notices to more than 71,000 companies while RoC Delhi has served notices to over 53,000 firms, among others.

As per the regulations, an RoC can seek explanation from a company if the latter has not commenced business within one year of getting incorporated under the Act.

Notice is also issued if a particular company has not been carrying out business for at least two continuous financial years and has not applied for dormant status.

Such entities are given a time of 30 days to submit objections if any.

The Ministry has power to remove or strike off the names of such entities from the “register of companies” if the response is not satisfactory.

Earlier this month, the Ministry had amended the Companies (Removal of Names of Companies from the Register of Companies) Rules.

There are more than 15 lakh registered companies in the country.

 

India eases rules to allow merger of Indian companies with foreign firms

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Under the new rules, the merger will also require prior approval of the Reserve Bank of India.

India will allow local companies to merge with overseas firms, easing rules to help home-grown businesses restructure their expanding global operations, and pave the deck for more listings of securities on capital markets abroad.

“Until now, only inbound mergers were permitted. With outbound mergers now permissible, there would be a lot of opportunities for Indian companies to acquire, restructure, or list on offshore exchanges as well,” said Mehul Shah, a partner at Khaitan and Co.

Until the federal notification by the corporate affairs ministry on April 13, India had permitted only inbound mergers. The merger would be in compliance with the Companies Act, 2013, and require prior approval of the Reserve Bank of India (RBI).

The notification also lists certain jurisdictions on the foreign companies, covering countries that comply with rules such as being members of the Financial Action Task Force (FATF) and whose central banks are members of the Bank for International Settlements (BIS).

Experts, however, believe that certain related laws must be amended before these rules take effect. “There would be need to have clarifications under tax laws. Exchange control regulations need to be re-looked and clarified to give effect to this notification. Also, an obligation is cast on RBI to provide approval for these mergers, as today, the RBI does not have mechanisms in place for this,” Shah added.

“Now exchange control regulations, securities laws, etc will need to be amended to facilitate a practical implementation of the amended law,” said Amit Maru, partner-transaction tax at EY.

The notification amends the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, notified in December 2016. Previously, mergers or demergers were governed by the Companies Act, 1956 before the notification of provisions of the Companies Act, 2013.

But, there were some gaps in the rules governing mergers. The latest notification seeks to fill these gaps. For instance, the law was earlier unclear on prior RBI approval even for inbound mergers, it is now clear that the nod is necessary.

“It might take some time for an Indian company to merge into a foreign company as it is not only one law but a host of laws which have to be amended before this becomes operational. For instance, income tax laws will have to be amended to give you a tax-neutral merger status because all mergers today are otherwise tax-neutral.” said Maru.The government had recently exempted firms, with Indian revenue of less than Rs 1,000 crore, from seeking the prior approval of the Competition Commission of India (CCI) while going in for a merger.

Bankruptcy and Insolvency Code will drive creation of a new debt market

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The Bankruptcy and Insolvency Code will drive growth of debt market in India, which hardly exists in corporate and business financing, Dr. MS Sahoo, Chairman, Bankruptcy Board of India

The Bankruptcy and Insolvency Code will drive growth of debt market in India, which hardly exists in corporate and business financing, Dr. MS Sahoo, Chairman, Bankruptcy Board of India told Fe. While the country has a matured and bullish equity market, the debt market in India was yet to develop. The board was not concerned with default in bank credits or about the rising NPAs. It would mainly look into private creditors interest if their money got locked.

“Banks have some protection in the areas of corporate financing but non banking debt is non existent. Bankruptcy and Insolvency Code would be instrumental in the growth of non bank debt financing, which would lead to reduce dominance of banks in areas of credit.

With a debt market created, debt supplies would ease out and lending rates both for the non banking creditors as well as for the banks would be market driven. “At present demand is chasing supplies but it will be other way round with supplies chasing demand,” Mamata Binani, chairperson, Institute of Company Secretaries of India (ICSI) said at an interactive session organised by the MCC Chamber of Commerce.

She said the code will enable to solve problems of many assets lying dead for years in dispute. Such assets could be quickly liquidated without the judiciary’s intervention and unsecured creditors will always have the first chance to realize its money from the business. The board has estimated that Rs 25,000 crore, which is locked in dead assets, is going to get unlocked in next five years.

While Sahoo made clear that the Bankruptcy and Insolvency Board would not deal with corporate frauds and inter managerial disputes, a creditor who has given unsecured loans should trigger the first available opportunity if he sees his credit at risk.

It will be a creditors committee, which will work on a strict time line, to resolve insolvency. The creditors will not be bound by any set rules to resolve insolvency or debtors problem. They will have flexibility to take their own decision and find a way out and that might come in the form debt restructuring or liquidation. However, if liquidation is unable to recover a debt, it may be a loss for both the creditor and the debtor, Alok Dhir, founder and and managing partner of Dhir & Dhir Associates said.

“But working with this code will gradually prove what is the right approach and there may be changes brought in the law,” Sahoo said adding that the board was also working on a framework for direct liquidation by passing insolvency resolution and the framework would be ready by February- March. But to begin the process on code a company has to address to the National Company Law Tribunal (NCLT), while for personal insolvency, a claimant will have to go to the Debt Recovery Tribunal (DRT). But the framework for personal insolvency was not yet ready and it would take some time before a party could move the DRT, Sahoo said.

However, the NCLT with 11 benches across the country was already functional with the code and there were chances that 93,000 pending BIFR cases could be referred to the board, many of which might not have to begin the process on code but through pre- pack solutions, Sahoo felt. He said the board has selected 974 insolvency professionals on a temporary basis and would begin certification through tests for inducting regular professionals.

Source: http://www.financialexpress.com/market/bankruptcy-and-insolvency-code-will-drive-creation-of-a-new-debt-market/506028/