Some time last year, the ministry of company affairs’ (MCA’s) ambitious, Rs 340-crore e-governance programme, called MCA 21, began a phased roll out with the help of Tata Consultancy Services (TCS). A week ago, the ministry announced that 3.63 lakh documents have electronically been filed since MCA 21’s launch last September.
Various procedures are to be stabilised by the end of March 2007, but some of the horrors relating to data entry, such as wrong names, spelling errors, missing data and strange squiggles that would mar the database have begun to be cleaned up. Maybe the next report of the comptroller and auditor general (CAG) will not say that “records and databases of companies maintained by the registrar of companies were either incorrect or incomplete or not updated”and that its databases did not have validation checks or could not prevent “unauthorised alterations”.
But it is one thing to outsource the mammoth task of cleaning messy data to a top IT company, or to introduce online registration of companies, and another to make systems work well. It will require a lot more work to erase our impression of the MCA as a dreadfully lethargic arm of the government with poor systems and gross inconsistency in the application of its own rules (one example is the manner in which the ban on the use of generic names by private sector companies are flouted with impunity). Moreover, regulation and enforcement have still to be ensured by the same government officials.
The CAG report, tabled in Parliament in December 2006, says that in five registrar of companies (ROC) offices, fines amounting to a whopping Rs 1,382 crore had not been recovered for the failure of 2,353 companies to hold annual general meetings (AGMs) as required under section 168 of the Companies Act. In 15 ROC offices, it found that 9,04,709 companies had not bothered to file annual returns (under sections 159 and 160) and 9,19,577 companies had failed to file balance sheets and Profit & loss accounts, as required under section 220 (i).
More alacrity about collecting statutory fines and penalties would avoid introducing a few new taxes in the forthcoming Budget
These lapses carry piffling penalties that badly need to be revised upwards, but the registrars had allowed uncollected penalties to add up to Rs 232 crore in the first case and Rs 237 crore in the second. The CAG says that prosecution was launched against only 1% of the companies that merrily flouted the rules. And internal controls were generally found to be poor and inadequate.
In a release issued on January 4, probably as a response to the CAG findings, the MCA has said that it will work with the TCS project to identify inactive companies that can be struck off the rolls. This is just the first stage. The MCA needs to get serious to its rhetoric about good governance by trawling its own database to identify malpractices. For instance, one knows of several specific cases where identical names are registered under different names. We already know Dinesh Dalmia of DSQ Software had perfected the art of registering companies with identical names all over the world to confound regulators. It is not clear if this is deliberate or due to manual systems that made comparisons difficult.
There are also examples where companies were allotted two different CINs because of typographical errors (example: Majestic Overseas Ltd and Majestic Overseas Pvt Ltd were given separate CIN numbers).
Companies that have changed their names also had old names reflected in the database. Clearly, if the finance ministry could persuade various arms of government to show more alacrity about collecting statutory fines and penalties, it would avoid introducing a few new taxes in the forthcoming budget. The failure to penalise companies for not submitting their balance sheets or annual reports makes a mockery of corporate discipline and is unjust to those who do diligently adhere to the rules. Private investment companies of industrialists or large capital market operators are adept at exploiting this situation. They refuse to file statutory information about their own operations and, at the same time, bribe petty officials to extract information about others.
The CAG report is important in another context as well. It says that the MCA had failed to create any institutional mechanism for coordination or correlation of data with other regulators such as the Securities and Exchange Board of India (Sebi) and the Reserve Bank (RBI). For instance, it found variation in the number of non-banking finance companies (NBFC) registered with ROC Delhi (1,274) and the figure according to RBI records (2,438).
The RBI began to register all NBFCs after financial scandals caused enormous losses to ordinary persons in the mid 1990s.
However, the CAG found 303 companies operating without an RBI registration.When it comes to Sebi, the lack of coordination between the regulators often borders on hostility. The MCA has frequently expressed reservation over what it believes is Sebi’s attempt to expand its powers over listed entities through the listing agreement of stock exchanges. Sebi has in fact mandated adherence to a corporate governance code, entirely through Clause 49 of this agreement. Fairly diligent enforcement of its rules has ensured that at least top listed entities disclose their corporate results in time and follow a set of governance rules such as the need to have independent board directors, or form audit and compensation committees with a specified composition.
But there are just around 9,000 odd listed companies as against the massive 7.5 lakh companies (including the 1.5 lakh companies that are defunct and yet to be struck off) registered with 20 ROC offices across the country that need better discipline.