It is an undisputed and generally accepted fact that Compliance is a requirement for operating the business in a transparent and legitimate manner. It is well defined principle that better corporate Governance will lead to more profitable and successful business ventures. The size and nature of the business, third party risks associated with business, acceptance of money from public etc are determining factors to fix the level of compliance .
The level of compliance will be higher for Public Listed Companies due to the public investment in that company. It is very important to regulate the activities of the said companies in transparent manner. Similarly the Public Limited companies are also having "unrelated investors" and the said companies are also required to be regulated in a moderate manner. As a part of bringing transparency and accountability to the Corporate World, the Ministry of Corporate Affairs, Government of India had implemented many new initiatives such as updating the KYC of Directors, closing down the inactive companies, striking off the shell companies, disqualification of defaulting Directors etc, which are warmly welcomed by the industry and its stakeholders.
Private Limited company means a company which is having restriction on transfer of its shares and having no prescribed minimum capital requirement. A private Limited company cannot accept deposits from persons other than shareholders, Directors and their relatives. A Private company cannot have more than 200 members and it cannot invite public to subscribe for its shares. It may be noted that the majority of the Private Limited companies are opened, funded and operated by individuals, who are either friends or relatives. The restrictions under the Companies Act is not permitting the Private Limited companies to accept deposits from public as well as to invite shares from the public. The promoters of the company are permitted to raise the capital only from relatives or from banks or financial institutions as loans. A lion majority of the Private Limited companies are closely held and being operated as a Family business concern.Such companies are supposed to be less regulated considering the ease of doing business and less involvement from the public. However the recently imposed exorbitant compliance requirements by Ministry of Corporate Affairs are making it difficult for Private Companies to operate in a peaceful atmosphere. The energy and money required to reach the level of compliance as desired by the Ministry is enormous and totally against the most boasted concept of "Ease of doing business".
Based on the power conferred under the provisions of Companies Act, 2013 the Ministry had issued several notifications in recent times, many of which are unnecessarily burdening the companies who are operating as private limited companies. Following are the newly introduced compliance requirements which are applicable to all the companies.
Filing of DIR 3 KYC for all the Directors
Filing of due amount towards MSME’s which are beyond 45 days.
One time filing of DPT 3 mentioning the details of monies accepted by companies from permitted sources.
Declaration of beneficial Ownership in shares.
Filing of particulars of Registered office address of the company.
The above requirement is over and above the regular compliance and filing requirements as envisaged in the Companies Act. A Private company having Paid up capital of Rs. 5 Crore or more have to file its annual accounts in XBRL (Extensive Business Reporting language) , which is a very lengthy and cumbersome document from practical angle. It is also mandatory for a private limited company having Rs 5 Cr or above paid up capital to appoint a Full time Company Secretary in its rolls. Originally only those Public Companies which are having paid up capital of Rs. 10 Crores or more were required to appoint a Full Time Company Secretary. But through an amendment in the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 , it is mandated on every company, including Private Companies, having a paid up capital of Rs. 5 Crores and above to appoint a Whole Time Company Secretary. This will also shoot up the compliance cost on the Private limited companies.
All the Companies registered in India are governed by the Provisions of the Companies Act, 2013 and rules made thereunder. As per the annual report of 2017-18 published by Ministry of Corporate Affairs, New Delhi, there are 11,59,945 active companies India. Out of the above active companies, 10,88,126 (93.81%) are Private Limited Companies. Only 69,895 companies are registered as Public Companies under Non-Government Sector.
As this is the reality, imposing of too many compliance requirements on Private limited companies are unjustified and illogical. All these compliance requirements are suffocating the small and medium level entrepreneurs who are operating their business in the form of Private Limited company as the cost on compliance had gone up considerably over the years and the same is not adding any value to the Company, business community or to other stakeholders.
Compliance of the law is a mandatory requirement and none of the stakeholders are against that concept in the larger interest of the Country. However, it is pertinent to note that presently the compliance requirements are implemented based on the paid up share capital of a Company. It is advisable to impose the compliance requirements in more logical manner as the Private Limited companies are not raising any money from “Public” and the General public or any section of public are not affected by the operations of a Private Limited company.
Instead of putting all the private companies at par with Public Limited companies, all the compliances mentioned above including the appointment of a Full time Company Secretary, may be mandated for a Private Limited company meeting any of the following criteria:-
A Private Company which had accepted 50% or more of its share capital from persons other than Directors and Relatives of Directors (Relatives as defined under section 2(77) of Companies Act); or
A Private Limited company which is having bank loans / debts beyond a specified limit; or
A Private Limited company having turn over above a specified limit.
The Private companies falling outside the above criteria may be classified as “closely held Private companies” and given relaxation in compliance requirements, irrespective of the capital base of the said companies. The above given criteria is more logical as there is a genuine requirement of proper surveillance system in such companies where there are more unrelated investors, had availed of more credit facilities in the form of loan or there is more turnover which is resulting in more operational creditors.
If the above issues are not addressed, the increased cost of compliance and unnecessary compliance requirements will make the Corporate world non-competitive and shall drive away the entrepreneurs from starting new companies.
BIJOY P PULIPRA
(The author is a Practising Company Secretary and Insolvency Professional and can be reached at email@example.com)