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Business News/ Companies / News/  Early bankruptcy warning on MCA’s future policy agenda

Early bankruptcy warning on MCA’s future policy agenda

The system would use financial statements filed by businesses to predict their insolvency

The ministry of corporate affairs said the projects it is funding will help improve regulatory oversight and give early warnings about corporate failings. mintPremium
The ministry of corporate affairs said the projects it is funding will help improve regulatory oversight and give early warnings about corporate failings. mint


Research topics proposed by the ministry of corporate affairs show its policy priorities for the future include predicting bankruptcy based on financial statements filed by businesses, integrating its company database with those of other regulators and extending sustainability reporting to unlisted companies.

In a request for proposals for research issued last week, MCA said these ministry-funded projects will help improve regulatory oversight, give early warning about corporate failures and improve ease of doing business.

One of the key projects for research is integration of the ministry’s database of statutory filings by businesses with those of other regulatory agencies. “Integration of MCA21 database and databases of other departments and regulators will not only aid in avoidance of multiple filing requirements but also strengthen enforcement," the ministry said.

According to experts, reducing multiple filings will improve ease of compliance—something that should have been introduced earlier. “The same information is given to different regulators as part of statutory filings, all of which is online. So, why not make statutory filings available to all relevant regulators? The idea should be to help businesses," explained Rajat Bose, partner at Shardul Amarchand Mangaldas & Co., a law firm.

This move may help the government in another way. Often diversion of funds raised as debt or the proceeds of a public float is linked to money laundering, tax evasion etc. These are governed by different laws such as Companies Act, PMLA or Income Tax Act. Integrating the database of the regulators can help the authorities quickly detect the extent of defaults and breaches

Another area of research is designing an early warning system for bankruptcies, considering factors such as increases in loans given to major shareholders (promoters) or group companies in comparison to the company’s debt, regular write-off of loans, evergreening of loans, mismatches in asset-liability for financial companies and increased pledging of promoter shares, the ministry said.

Asset-liability mismatches were cited by experts as the reason for the severe financial stress that non-banking finance companies have gone through in recent years. Non-bank lenders have to incorporate as companies.

Using the extensive database of financial statements available with the ministry to develop a model for predicting bankruptcies is another research proposal that the ministry intends to finance.

Improving the ease of doing business is a major area of research. Examining the feasibility of forming advance ruling authorities for the Companies Act like those existing for Income Tax and GST is another area the ministry is keen to explore. Advance ruling authorities give opinions on the legal provisions applying to a proposed transaction, a scheme meant to reduce litigation.

Social goals of corporations that go beyond profit-making for shareholders is a key area the ministry is exploring for insights. One of the research subjects proposed by the ministry is the feasibility of extending Sebi’s Business Responsibility and Sustainability Reporting (BRSR) beyond listed companies and for voluntary reporting.

Evolving a corporate governance index is yet another area for research. Along with measuring companies’ performance on this front, such an index may offer solutions to identified shortcomings, the ministry said.

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Published: 16 May 2022, 12:35 AM IST
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