Corporate Compliance(s) In India – A Double Edged Sword

In the present times, the Ministry of Corporate Affairs (“MCA”) is perpetually blaring the conch shells of “ease of doing business in India ” by guaranteeing hassle-free company incorporations to streamline companies’ periodic filings. The current trend of back-to-back compliance reforms can be gauged through the recent introduction of compliances by the Ministry, ranging from KYC filings of Directors to filing of Form ACTIVE.

We understand that the intent of the Ministry behind such new compliances is to bring transparency and veracity in the daily business operations of companies. These changes have been instrumented to make the process more detailed and law-abiding.

However, in striving to attain the same, one cannot ignore the inconvenience and the cost borne by the stakeholders at large. But it is equally important to understand that the inconvenience and cost that companies need to undertake with respect to this is a one-off instance as opposed to the long-term benefit and hassle-free process with which they get to do business in India.

Particularly in the case of companies whose directors were foreign nationals residing outside of India, the costs associated with this compliance were significantly higher because all their KYC documents were required to be apostilled and notarized.

Therefore, we can say that compliances come with both pros and cons, and they both go hand-in-hand.

For instance, let’s consider the example of Form DIR-3 KYC which was introduced in the previous Financial Year, i.e. for 2018-19. While there was no fee initially to file the form, any filing after the due date of 15 September 2018 were liable to a penalty of INR 5,000/- per director, followed by the deactivation of her Director Identification Number (“DIN”). Accordingly, there were many defaulting directors whose DINs were deactivated on account of non-filing of Form DIR-3 KYC. However, those can be reactivated upon the payment of a penalty of INR 5,000/-.

Thus, one needs to look at both the positives and negatives of such a compliance to understand its impact in more absolute terms. On one hand, it ensured that through these filings the MCA not only obtained a detailed record of the KYC credentials of all registered Directors across the country but also identified those Directors who held multiple DINs, the latter consequently incurring disqualification(s) under section 164(2) of the Act.

Whereas on the other hand, defaulting directors could conveniently elude the repercussions of defaulting in the above-mentioned scenarios by paying the penalty amount which probably wasn’t even a financial burden for them.

Thus, such compliance reforms might seem like a financial burden on companies, especially on small firms and start-ups, in terms of filing costs. However, in the sense of a bigger picture, such compliances ensure stringent adherence with the law to bring about a more compliance-oriented approach in day-to-day working of companies.

There is another compliance introduced by the Ministry, which is the filing of details of a company’s registered office in the Form ACTIVE.

The intrinsic purpose behind this compliance is to track and bring on record, all the shell companies which are operating for money laundering purposes only, and subsequently strike them from the records of the Ministry. However, this compliance poses the basic challenge in the scenario of group companies operating from the same registered office as their base of operations. Hence, in such cases, group companies which might be operating as shell companies – particularly in the real estate sector – simply elude the scrutiny of the MCA.

So going forward, in order to encourage transparency and authenticity in the day-to-day operations of companies, the Ministry – while introducing new compliances – could also consider that the newly-introduced compliances are streamlined in such a way that instead of becoming a tedious and costly affair, they should act as a wake up call for all the stakeholders of companies, from the directors to the shareholders, thereby making them vigilant in their daily compliance.

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