Companies evading from Annual Reporting barred from E-filing Access

The corporate affairs ministry proposed in May 2011 that companies that fail to file key annual information should not be allowed to make other mandatory regulatory filings. The proposal was made by the ministry with an objective to discipline errant firms.

The proposal comes after the ministry found that many companies were filing only event-based information under the ministry's e-governance database but were not submitting the statutory annual and financial audit reports.

The ministry decided to implicate key officials of companies-company secretary and auditors-by prohibiting them from signing any document for filing with the MCA-21 system, the government's electronic platform made mandatory five years ago.

The proposal would make the functioning of defaulters difficult and also compound their offences for they will not be able to meet regulatory requirements of submitting all necessary forms, allowing the ministry to take stronger action.

The filings to be stopped include application for giving loan, providing security or guarantee. Filing in respect of consolidation, division or increase in share capital or increase in number of members will also be not allowed for defaulters. Defaulting firms will also not be able to apply for approval for change of name or conversion of a public company into a private company. These limitations introduced will make it difficult for companies to interact with other stakeholders.

As per the government data over 50% of companies that are required to file their annual reports and balance sheet do not do so. Defaulting companies face penal action under the Companies Act from the registrar of companies after a show-cause notice is issued. 

As per provisions of the Companies Act, non-filing of annual accounts and annual returns makes the company and all its officers liable to a fine up to Rs 500 per day. The non-filing resulted in the ministry's failure to create records of companies in electronic form that can be quickly accessed in suspected cases of money laundering and fraud. Electronic records enable appropriate software to mine data and provide early warning about sudden changes in the financials of a company that could suggest some manipulation.

The government had announced an amnesty scheme-Company Law Settlement Scheme (CLSS ) 2010-that allowed companies to update their filings by paying a 25% extra fee. Such companies were given immunity from further prosecution. Defunct companies were also provided an exit scheme-Easy Exit Scheme (EES ) 2010-under which they could get their names struck off the Register of Companies after providing their up to date statement of accounts. Both the schemes failed.

The ministry's facility of electronic filing of documents is aimed at lowering compliance cost for companies and brings transparency in their affairs.