In shell firm clean-up 2.0, MCA tells Registrars to physically verify companies’ registered address

Taking its drive to weed out shell companies and inoperative businesses to the second stage, the Corporate Affairs Ministry (MCA) has brought in rules to tighten the verification process post-incorporation stage.

In the first stage of extinguishing shell and defunct companies, the MCA has, in the last five years, removed over four lakh companies from its Register of Companies owing to several defaults, including non-compliance on filing of financial statements and annual returns. 

The latest rules spell out the process to be followed by the Registrar of Companies (RoCs) for physical verification of the registered office of companies that are reckoned to be not in existence or not having business operations even though incorporation has happened and the company concerned has intimated MCA21 about its registered office address.

In effect, the new rule operationalises a provision in law that allowed physical verification of registered offices by RoCs for inoperative companies where the office concerned is not able to receive government communications. The company law was amended in July 2019 to allow RoCs to do physical verification of registered offices of companies where the Registrar has reasonable cause to believe that the business—after incorporation of the company—may be inoperative. This physical verification of the registered office is essentially a post-incorporation activity.

Operation Clean-up 2-0

Company law experts see the latest MCA move to prescribe the process of physical verification of the registered office as a second round of “operation clean up” of defunct and inoperative companies. 

The objective of the latest MCA move could be manifold, including tracking of shell companies, vanishing companies and also a probe into Chinese companies, many of whom were found to have different registered offices and some even did not have a registered office at all, sources added.

G Ramaswamy, former President of the CA Institute, said this latest MCA move is right to start operation clean-up of all shell and bogus companies. “Good move as part of real entity identification. It will also help identify genuine directors. Defunct companies can be identified through this process by RoCs before striking off their names,” he said.

Meanwhile, official sources said that the new rules will not be used indiscriminately and there are enough “safeguards”, including recorded reason for the physical verification, which will be undertaken in the presence of two independent witnesses. There will be no harassment of genuine companies, they added. 

Local Police assistance could also be taken by the RoC for the physical verification. The Registrar will have to take a photograph of the registered office of the company while doing physical verification of the same.

Aseem Chawla, Managing Partner, ASC Legal, said that the current MCA move would go a long way in the filtration exercise of identifying inactive entities. 

“Also, this would facilitate the eradication of shell companies and companies controlled by Benami names. The RoC’s physical verification exercise should not fall prey to any nepotism, and the fact-finding effort should be carried out in a non-intrusive way,“ Chawla said.

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