Registration of companies decreased by 50 % after Companies Act 2013

The reg­is­tra­tion of com­pa­nies has halved in the first five months of this finan­cial year, with some ana­lysts blam­ing it on cum­ber­some com­pli­ance require­ments of the new com­pa­nies act. The num­ber of com­pa­nies that were reg­is­tered in April-August fell to 21,260 from 43,000 a year ear­li­er, accord­ing to offi­cial sta­tis­tics. The cumu­la­tive autho­rised cap­i­tal of com­pa­nies reg­is­tered in the first five months declined toRs 7,500 crore from Rs 20,500 crore.

The Com­pa­nies Act, 2013, which came into force in April, replac­ing a 58-year-old law, was aimed at facil­i­tat­ing busi­ness-friend­ly cor­po­rate reg­u­la­tion, improv­ing cor­po­rate gov­er­nance norms, enhanc­ing account­abil­i­ty on the part of com­pa­nies and audi­tors, rais­ing the lev­els of trans­paren­cy and pro­tect­ing the inter­ests of investors, espe­cial­ly small investors.

“The imple­men­ta­tion of the new act has impact­ed both large and small busi­ness­es, albeit in dif­fer­ent ways, and this is also pos­si­bly result­ing in a less­er num­ber of new com­pa­nies being set up,” said Sai Venkatesh­waran, a part­ner and head of account­ing advi­so­ry ser­vices at KPMG in India.

New rules includ­ing those requir­ing direc­tors to obtain dig­i­tal sig­na­tures before apply­ing for a Direc­tor Iden­ti­fi­ca­tion Num­ber, busi­ness licens­es for pri­vate com­pa­nies, addi­tion­al doc­u­ments such as no-objec­tion cer­tifi­cates from rel­a­tives and oth­er part­ners for approval of names and a fixed finan­cial year have made set­ting up com­pa­nies more cum­ber­some, espe­cial­ly for small busi­ness­es. Pre­vi­ous­ly, pri­vate com­pa­nies were allowed to accept deposits or loans from rel­a­tives of direc­tors, which the new act has curbed.

“Due to lack of clar­i­ty in the new act, strin­gent duties of direc­tors and require­ment of var­i­ous approvals, includ­ing relat­ed-par­ty trans­ac­tions and increased fines and impris­on­ment penal pro­vi­sions being incor­po­rat­ed in the new act, the reg­is­tra­tion of com­pa­nies has dropped sig­nif­i­cant­ly,” said Sharad Vaid, a part­ner at law firm Khai­tan & Co.

The min­istry of cor­po­rate affairs, which is tasked with the admin­is­tra­tion of the Com­pa­nies Act, 2013, and oth­er laws reg­u­lat­ing the func­tion­ing of the cor­po­rate sec­tor, is look­ing to sim­pli­fy the reg­is­tra­tion process.

“We are aware of the issues… We are look­ing at how best to address them and are also hold­ing meet­ings with stake­hold­ers includ­ing indus­try cham­bers to review the sit­u­a­tion,” said a senior cor­po­rate affairs min­istry official.

Experts say larg­er com­pa­nies are impact­ed by the require­ments of the new law on inter­com­pa­ny trans­ac­tions, includ­ing loans between relat­ed par­ties, while small­er com­pa­nies are affect­ed by tedious com­pli­ance require­ments that are cur­rent­ly applic­a­ble equal­ly to both pri­vate and pub­lic com­pa­nies, includ­ing fund rais­ing. Ana­lysts expect larg­er com­pa­nies to opt for restructuring.

“In case of larg­er cor­po­rates, one expects to see more ratio­nal­i­sa­tion of enti­ties with­in a group and also parts of growth in busi­ness­es being struc­tured as divi­sions rather than as sep­a­rate enti­ties, there­by elim­i­nat­ing inter­com­pa­ny relat­ed-par­ty trans­ac­tions by mak­ing them intra-com­pa­ny trans­ac­tions,” Sai of KPMG said.

Small­er busi­ness­es are in a wait-and-watch mode as sev­er­al pro­vi­sions of the 1956 Act have not been car­ried forward.