Corporate affairs minister Arun Jaitley. The ministry of corporate affairs will soon notify a scheme to provide relief to over 300,000 directors disqualified for associating with companies that failed to file their financial results. Photo: Indranil Bhoumik/Mint
Corporate affairs minister Arun Jaitley. The ministry of corporate affairs will soon notify a scheme to provide relief to over 300,000 directors disqualified for associating with companies that failed to file their financial results. Photo: Indranil Bhoumik/Mint

Shell companies: Govt may provide relief for disqualified directors

Starting January, shell companies can apply for a pardon for three months, and, for this period, the disqualification of directors will be lifted to allow them to file these documents

Mumbai: The ministry of corporate affairs, or MCA, will soon notify a scheme to provide relief to over 300,000 directors disqualified for associating with companies that failed to file their financial results, said two people with knowledge of the matter.

Non-compliant companies can apply for a pardon (or condonation of delay) for three months starting January; for this period, the disqualification of their directors will be lifted temporarily to allow them to file these documents. The window for filing all pending documents will be open till 30 June, said a copy of a draft circular reviewed by Mint.

In September, the government had taken two sets of action against companies that were not compliant with provisions of the Companies Act. 

The first was against firms that appeared to be non-functional or shell structures. On 5 September, 209,000 companies were struck off the Registrar of Companies (RoC) database and banks were directed to restrict operation of bank accounts of such companies by their directors and authorized representatives. 

The second was against companies that did not file their returns/financial documents for the past three years. As per the MCA directive, 309,614 directors were barred from serving on the board of any company for the next five years. Any digital signatures by these directors on annual reports, financial results and other company documents were not to be accepted by RoC. 

“The companies that do not appear to be working cannot subscribe to the scheme. They will first need to revive the company and show that they are in a working condition and get an approval from the National Company Law Tribunal (NCLT) to meet other compliances," said one of the two people cited earlier. 

“The defaulting companies which had not filed their returns for some reason or the other but otherwise look to be functional would be allowed to submit their pending documents. After submitting pending documents these companies and their directors will be able to get relief from the strictures," this person added. 

Companies and directors who do not avail of the scheme will remain disqualified and MCA will take further action against them under provisions of Companies Act, 1956/2013, the draft circular said. 

“I look at this as a pragmatic move by the government to differentiate between companies that are black sheep and companies that are in the grey. With this the government will be able to focus its energies on companies that are truly non-compliant (rather than a) larger set of companies and directors who appear to be in the grey zone," said Samir Paranjape, partner at consultancy firm Grant Thornton India LLP.

The ministry’s move comes after representations from many directors and cases filed in courts. At least 500 publicly traded firms shared directors with suspected shell companies.

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