Crackdown on shell companies MCA amends the Companies Incorporation Rules to provide for additional physical verification of registered offices

Background:

The Ministry of Corporate Affairs (“MCA”), vide notification dated August 18, 2022, notified the Companies (Incorporation) Third Amendment Rules, 2022, which further amended the Companies (Incorporation) Rules, 2014 (“Companies Incorporation Rules”), through the introduction of Rule 25B. This amendment sets out the process to be followed by the Registrar of Companies (“ROC”) to carry out physical verification of a registered office of a company.[1]

Although Section 12(9) of the Companies Act, 2013 (“Companies Act”), already empowers the ROC to conduct a physical verification of a company’s registered office if he or she has reasonable cause to believe that the company concerned is not carrying out business in a proper manner, the introduction of Rule 25B gives teeth to this power by clearly laying down the process to be followed to conduct the verification.

This change is in line with the MCA’s efforts to identify and crack the whip on shell companies operating in India. Further, in light of the government’s sustained efforts and increased scrutiny through the Enforcement Directorate in tracking down shell companies, the insertion of Rule 25B is an additional weapon in the hands of the government to undertake scrutiny and come down on shell companies.[2] News reports suggest that earlier in July, the MCA had informed the Lok Sabha that a total of 1,12,509 companies had been struck off from official records in a little over three years.[3] Thus, this amendment is a strong move to deter individuals from setting up shell companies.

Process for physical verification of the registered office: 

Rule 25B of the Companies Incorporation Rules sets out the process for physical verification of the registered office of a company. It provides for the verification to be carried out in the presence of two independent witnesses, cross verification of documents filed on MCA 21[4], photograph of the office and mandates the submission of a report. The process is described in detail below:

(i) Two independent witnesses from the locality and assistance from the local police: The ROC may visit the registered office for physical verification in the presence of two independent witnesses from the locality of the registered office and if needed, also seek assistance of the local police.

(ii) Cross verification of documents as filed on MCA 21: The ROC may carry the documents filed on MCA 21, supporting the address of the registered office and cross verify them with the documents collected during the physical verification. These documents must be duly authenticated from the occupant of the property where the registered office is situated. This is to ensure the authenticity of the documents.

(iii) Photograph: Thereafter, the ROC is required to take a photograph of the registered office.

(iv) Submission of the report: Finally, the ROC is required to prepare a report containing various details such as the name, corporate identification number, latest address of the registered office as per the MCA 21 record, date of authorisation letter, name of the ROC, date and time of physical verification, location details with landmark, details of the person available at the time of the visit, remarks along with the relevant documents. In this context, the relevant documents are: (a) a copy of the agreement/ ownership/ rent agreement/ no objection certificate of the registered office from the owner/ tenant/ lessor; (b) photograph of the registered office; (c) self-attested ID-card of the person available; and (d) any other documents.

Rule 25B also provides for the consequences if the registered office is found incapable of receiving and acknowledging all communication. In such a situation, the ROC is required to issue a  notice to the company and all directors of the company, informing them of his/ her intention to remove the name of the company from the register of companies and seeking their representations (if any), along with copies of relevant documents, within a period of thirty days from the date of the notice, before removing the company’s name from the register of companies (in accordance Section 248 of the Companies Act).

Thus, through the introduction of Rule 25B, the MCA has laid down a rigorous and detailed process to ensure transparency in the verification process, leaving little room for deviation.

Assessing the impact of the amendment:

 This amendment is a powerful move to ensure that shell companies are identified, and registered offices of companies are not mere post boxes. It also confers power on the ROC to remove the name of the company in case of non-compliance.

However, in addition to deterring the formation and existence of shell companies, this amendment also has far reaching consequences on foreign entities that have subsidiary entities in India and engage third parties to provide registered office services. In addition to having a resident director, foreign companies will now also have to also ensure that the registered offices of their subsidiaries pass the test if the ROC conducts a physical verification of the premises.

Foreign companies that are only testing the waters and do not have an existing presence or a wide network in India often engage service providers to assist with registered office services, as it might not be commercially viable to start complete operations and invest heavily in a registered office. With this amendment, the ROC might treat such arrangements as being non-compliant with the Companies Act, 2013. This, in turn, may compel foreign companies to ensure that their subsidiaries in India have their own registered office space from their incorporation.

Foreign entities, which have already set up  companies in India and are availing services of third-party service providers, must also assess whether they would have to move their registered office into their own offices or open a standalone office. In which case, they must ensure that a registered office, in accordance with the Companies Act, is functional and passes the test of physical verification, and therefore there is a stronger emphasis on compliance with the letter and spirit of the law. Given the sentiment of the MCA to come down heavily on shell companies and the limited time frame of thirty days to defend any ROC notice by making appropriate representations, foreign entities must act swiftly to comply with the Companies Act and Rule 25B of the Companies Incorporation Rules.


[1]https://egazette.nic.in/WriteReadData/2022/238217.pdf

[2] https://www.thehindu.com/news/national/400-chartered-accountants-company-secretaries-under-scanner-for-helping-chinese-firms/article65540449.ece

[3] https://www.deccanherald.com/national/government-amends-rules-for-physical-verification-of-companies-registered-addresses-1137609.html

[4]MCA 21 is an e-Governance initiative of MCA, Government of India that enables an easy and secure access of the MCA services to the corporate entities, professionals and citizens of India – https://www.mca.gov.in/Ministry/pdf/MCAV2Release2_Help.pdf

 

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Partner  in the General Corporate Practice at the Bangalore office of Cyril Amarchand Mangaldas. Bharath advises on entry strategy, foreign investment, investigations and general corporate advisory, specializing in employee stock options, investigations and executive appointment and remuneration. He is also part of the

Partner  in the General Corporate Practice at the Bangalore office of Cyril Amarchand Mangaldas. Bharath advises on entry strategy, foreign investment, investigations and general corporate advisory, specializing in employee stock options, investigations and executive appointment and remuneration. He is also part of the core team of the firm’s Corporate Governance Centre, the first of its kind, it is the centrepiece of the Firm’s thought leadership and advisory initiatives in the practice area, which focuses on advising various stakeholders in the governance space. Bharath can be reached at bharath.reddy@cyrilshroff.com

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Director in the General Corporate Practice at the Bangalore office of Cyril Amarchand Mangaldas. Sindhushri advises on India entry strategy, corporate governance, employment and general corporate advisory specializing in employee benefit schemes (including employee stock options and share appreciation rights) and restructuring of…

Director in the General Corporate Practice at the Bangalore office of Cyril Amarchand Mangaldas. Sindhushri advises on India entry strategy, corporate governance, employment and general corporate advisory specializing in employee benefit schemes (including employee stock options and share appreciation rights) and restructuring of employee benefit schemes, executive appointment and remuneration, and business/asset transfers. She can be reached at sindhushri.badarinath@cyrilshroff.com

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