The Centre has taken the next big step towards accelerating the process for voluntary winding up of companies. The Corporate Affairs Ministry (MCA) has now established a dedicated unit — Centre for Processing Accelerated Corporate Exit (C-PACE) in IMT Manesar, Gurugram — as part of its overall efforts to speed up the voluntary winding up of companies from the currently required two years to less than 6 months.
C-PACE will be located at the Indian Institute of Corporate Affairs (IICA) in Manesar. It maybe recalled that the Finance Minister Nirmala Sitharaman had in her Budget speech last year announced that C-PACE would be set up during 2022-23.
“Several IT-based systems have been established for accelerated registration of new companies. “Now the Centre for Processing Accelerated Corporate Exit (C-PACE) with process re-engineering, will be established to facilitate and speed up the voluntary winding up of these companies from the currently required 2 years to less than 6 months”, Sitharaman had said in her budget speech last year.
C-PACE will go functional from April 1 this year.
With this move, all the STK forms will be processed with C-PACE at Manesar Gurugram, instead of the earlier practice of State Registrar of Companies (RoCs) dealing with the same, sources said.
The Centre has been taking several steps to make entry as well as exit seamless for entrepreneurs so as to give a push to the Make in India initiative. The aim is to, among other things, reduce the time for completion of voluntary winding up of companies.
Sawant Singh, Co-Founding Partner, Phoenix Legal, said “The speed with which this (C-PACE) has been set up signals the government’s desire to push the “Make in India” initiative. Not all ventures are successful, so exit has to be made seamless to give entrepreneurship a fillip as also make India a viable destination”.
For start-ups, which failed due to various reasons, the bureaucratic and process inefficiencies were coming in the way of seamless exits. For most of them, it takes about two years to voluntarily wind up an enterprise.
Nearly five years back, the Economic Survey had highlighted the ‘Chakravyuha Challenge’ for India where it was relatively easy to enter, but barriers to exits remained. It had also highlighted that India seems to have a disproportionately large share of inefficient firms with very low productivity and with little exit. This lack of exit generates externalities that hurt the economy. Also, any impeded exit has substantial fiscal, economic, and political costs.
Aseem Chawla, Managing Partner, ASC Legal, said “ Keeping in line with the announcement made in Budget by Union Finance Minister; a welcome dispensation is proposed by the MCA with the establishment of this dedicated centre; with effect from April 1, 2023. It is expected that the time frame for closure of companies eligible would be less than six months. All in all step in right direction in furtherance of ease of doing business”
Costs
As regards fiscal costs, it was pointed out that inefficient firms often require government support in the form of explicit subsidies (for example bailouts) or implicit subsidies (tariffs, loans from state banks).
There are also economic costswhenthereismisallocation of scarce resources and factors of production in unproductive uses including overhang of stressed assets on corporate and bank balance sheets.
As for political costs,any government support to “sick” firms can give the impression that government favours large corporates, which politically limits its ability to undertake measures that will benefit the economy but might be seen as further benefitting businesses.
One of the objectives of the Insolvency and Bankruptcy Code — introduced in year 2016 — was to facilitate faster exits for failing companies that could not be resolved. However, the outcomes under IBC have been mixed.