With govt ready to hit Ctrl+Alt+Delete, startups must get serious about compliance

With govt ready to hit Ctrl+Alt+Delete, startups must get serious about compliance
Photo Credit: Shah Junaid/VCCircle
12 Jun, 2018

There are more than 17 lakh registered companies in India, according to the Ministry of Corporate Affairs. At least 11 lakh of these firms are active.

It is mandatory for all registered companies to file financial documents with the Registrar of Companies (RoC), which comes under the ministry. Now, the country’s finance ministry is getting strict about this practice.

Last week, the Ministry of Finance issued the following statement:

“For 2nd drive to be launched during current FY 2018-19, 2,25,910 companies have been further identified for being struck-off under section 248 of Companies Act, 2013 along with 7191 LLPs for action under section 75 of the LLP Act, 2008 due to non-filing of financial statements for 2015-16 & 2016-17.”

Simply put, the registrations of 2.26 lakh companies and more than 7,000 Limited Liability Partnerships (LLPs) stand to be cancelled for not filing their financial statements for the financial years 2015-16 and 2016-17.

In an earlier drive in the previous financial year, the government had identified and removed another 2.26 lakh companies from the RoC on the same grounds.

The rules have long been in place. What has changed is that the government is finally cracking the whip on defaulters.

For large companies with a well-defined finance team and a chief financial officer, filing such documents is a mere formality. But it’s a different story for startups, which typically comprise small teams and may not have a person designated to balance the books.

A number of new-age startups are often late in filing their financial statements. For instance, ANI Technologies Pvt. Ltd, which runs cab aggregator Ola, is yet to file its detailed financials for 2016-17. An email query sent to Ola seeking comment about this delay did not elicit a response till the time of publishing this report.

Under the Companies Act 2013, every company is required to conduct an Annual General Meeting (AGM) for every financial year. 

AGMs are to be held within six months of a financial year ending, according to Amit Singal, founder and chief executive of Startup Buddy, a firm which offers legal assistance to startups.

Companies are supposed to file their “Annual Returns and Balance Sheet eForms”, which is also called Form AOC4, with the RoC within one month of the AGM being held.

This essentially means that most startups need to file their financial statements by the end of October.

Singal said that it is better to upload files a little before the due date.

“If you are filing on the last day, since many others will be trying to do the same, then there is a chance that the RoC site may crash,” he added.

From July 1 this year, delay in filing annual returns will lead to a fine of Rs 100 per day.

The normal filing fees range from Rs 200 to Rs 600 depending on the size of the share capital of the company. The filing fee will also increase depending on the length of the delays.

A number of startups have been paying the fines and moving on. But the matter no longer ends with penalties. The government is also disqualifying directors of those companies that have failed to comply with the norms for two financial years in a row.

In 2017-18, the government suspended 3.10 lakh directors of various companies for not filing their financial statements or annual returns for a continuous period of two or more financial years

“This is good in a way. The companies and the directors will make sure that all reports are filed on time,” said Roma Priya, a legal adviser and founder of Burgeon, a legal advisory services firm for startups. “Anyway, before raising an external round of funding, every compliance will be checked by the investors.”

There is also another factor at play.

Some companies may be dormant or may have shut down their operations altogether. But technically and legally, they may be still “active.”

Analysts say this happens because the process of being struck off the records can be tedious.

In a formal winding-up process, also called 'liquidation', all assets of a business are disposed, creditors are paid, and any remaining assets or proceeds are distributed to shareholders. The last stage is termed 'dissolution', where the juristic identity of the company ceases to exist. 

https://www.techcircle.in/2017/01/02/why-startups-prefer-to-shut-down-instead-of-winding-up-operations/The law stipulates that to completely dissolve itself, a company must submit an application to the Registrar of Companies (RoC) to get its name removed. This process could take a couple of years to be completed.

So for firms on the verge of shutting down, the government’s efforts to strike them off the rolls could well be a blessing in disguise.