• Notification Date: 26-06-2023
  • Notification No: N/A

MCA to Intensify Crackdown on Non-functional Companies

The ministry of corporate affairs (MCA) is planning to harden a crackdown on non-functional (shell) companies, having already struck off hundreds of thousands of such firms that are often used to funnel black money, people aware of the details said. 

The physical verification of “non-functional or non-compliant firms” by the Registrar of Companies (RoC) will pick up further. “The drive under the Section 12 of the Companies Act, is only going to intensify now,” the person told ET. “The move may also foster some discipline among companies so that they will take various compliance requirements more seriously,” said another person. 

According to the Section 12, a company must have a registered office “within thirty days of its incorporation and at all times thereafter”, which will be capable of receiving and acknowledging all communications and notices. 

As many as 1,27,952 companies were struck off from the official records in the last three years, minister of state for corporate affairs Rao Inderjit Singh had told the Lok Sabha in February. The MCA has kept alive the drive that had gained unprecedented traction in the immediate aftermath of the 2016 demonetisation exercise. 
The latest decision would complement the ongoing drives by the taxman or the Enforcement Directorate against various shell companies, one of the persons said. 

The database being generated under the latest version of the MCA21 portal, meant for various filings under the Companies Act and the LLP Act, will also come in handy in such drives in the coming months, said another person. 

Interestingly, the term “shell company” isn’t defined under the Companies Act 2013, so non-functional firms and those that don't comply with various rules and regulations are often perceived as "shell" firms. The government had earlier undertaken a special drive for the identification and striking off companies, which had not filed their financial statements or annual returns for two straight years, under relevant provisions, Singh had said. 

The MCA has already notified the Companies (Incorporation) Third Amendment Rules, 2022, by introducing Rule 25B, which typically sets out the precise process that must be followed by the RoC for conducting physical verification of a company’s registered office. 

The introduction of the new rules further bolsters the power of the RoC, who has been already authorised under Section 12(9) of the Companies Act to undertake the physical verification of a company’s registered office if they have reasonable doubt about a company’s operations.