Freezing of Folios of physical shareholders... Last date for KYC is 30th September 2023... Act now Ref: SEBI Circular SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/37


MCA Move: “Clearance Drive against Ghost Directors“

MCA Move_ _Clearance Drive against Ghost Directors_

MCA Move: “Clearance Drive against Ghost Directors“

The Ministry of Corporate Affairs (MCA) is currently proactive in relation to directors. MCA is taking stringent steps against fake companies and their concerned directors. The motive behind these moves is to curb fraudulent transactions, control the network of shell companies, remove non-compliant companies and their defaulting directors. The government believes that shell companies and bogus directors are key channels for generating black money. Funds are routed through a web of companies, whose real ownership is not easily available. This step is a clearance drive where MCA is performing sorting to retain compliant companies and their directors and remove the other non-compliant companies.  This move will reduce the regulatory monitoring burden of the MCA and will bring in transparency. Through this move, only sincere companies will be allowed to run their business with the full support of the MCA and other regulators.

In order to effectively carry out monitoring drive, MCA has become vigilant and has taken various steps to infuse transparency.

steps to infuse transparency

The above are the recent traces of the steps MCA has taken to regulate and perform Cleanliness drive against the companies registered. As a result of the above moves, many companies and their concerned directors have been removed from MCA records. A massive drive was recently carried out by MCA wherein it struck off around 2.5 Lakh shell companies along with their concerned directors for the reason of non-filings of annual accounts and returns as are required to be filed by the companies. By this move such companies were frozen from carrying out any business; making transactions from a companies bank account, entering into transactions for buying and selling of assets & liabilities.

The strike-off move by MCA can be categorized or nicknamed as “Demonetization of companies”. The companies falling under the ambit of strike-off were in similar panic situations like that of the individuals at the time of demonetization. The concerned directors were in trouble to get the disqualification removed anyhow because ultimately they were majorly affected by this drive. Due to non-filings in a single company, which ultimately was declared struck off, the directors holding directorship in multiple companies had to suffer because of that non-compliant company in the other active companies.

The directors were not able to get their disqualification removed or were in the process of getting the disqualification removed when MCA vide notification dated 21st June 2018 brought an e form for surrendering DIN. The MCA following the path of digital India launched an online version of DIR 5 for surrendering DIN. Earlier the DIR 5 was a physical form that was attached with RD 1 eform. The online DIR 5 will facilitate the directors in surrendering their DIN easily and quickly. All those directors who were in possession of multiple DIN were required to surrender all the DIN except one.

Later MCA clarified the issues arising in the surrender of multiple DIN. MCA clarified that the directors if in possession of multiple DIN shall retain with themselves the oldest DIN and surrender back all the other DINs. All the companies associated with the multiple DINs where DIN has been used or not with regard to any company shall be mapped to the retained DIN. This was a must-required step because there were many directors who intentionally or unintentionally were in possession of multiple DINs. Through this eform the directors have got a way out to surrender their multiple DINs. The Regional Director, Noida issued show-cause notices under section 266 to approximately Two lakh directors to surrender their multiple Dins. Directors in possession of multiple DINs abut did not receive show cause notice were also advised to surrender the multiple DINs except one.

Following the parallel track of KYC for Individuals, MCA came up with the KYC for Directors. A new eform i.e. DIR 3 KYC was brought for all the directors whether they are active or disqualified directors. Through this form, MCA verified the details of directors with that in its database and also for updating the same in its registry. The form was a means of verifying the personal details of the directors. Accordingly, every director who had been allotted DIN on or before 31st March 2018 was mandatorily required to file form DIR 3 KYC on or before 31st August 2018 without payment of a fee. After the expiry of the due date the respective DIN even if approved was to be marked as “Deactivated” for non-filing of DIR 3 KYC. Till 31st August, which was the deadline for filing the eform only a few directors complied with the requirements of MCA.

As a result of which MCA in order to invite more eforms from the remaining directors had to extend the due date of filing the said eform without payment of any penalty. The deadline for filling the form without penalty was extended to 15th September after which a penalty of Rupees 5000 was to be attracted for filing the said form. By 15th September only 1.2 million directors out of 3.3 million directors filed their DIR 3 KYC. The scenario now was that the remaining 2.1 million directors would have to file their DIR 3 KYC along with a penalty of Rupees 5000 for reactivation of their DIN.

MCA on 16th September removed DIR 3 KYC for filing purposes and started preparing a list of directors who did not file their KYC form for deactivating their non-compliant DIN. The ministry was not seen to be liberal in extending further the due date. The motive for the DIR 3 KYC drive was to free and clean the boards from drivers, domestic help, and other persons present on the board without the knowledge of the other board members. The Times of India in its edition dated 16th September mentioned that “As part of cleaning up the board, the non-compliance for the KYC could be due to a large number of ghost directors. Weeding out ghost directors is part of a crackdown on shell companies.”

The morning of 16th September was a buzzing one because directors were in the expectation that the window for filing KYC without penalty would be kept open by the government. A senior official expressed his views stating that “We are looking at the option of either providing a reopen of the window for 15 days or reducing the late fee amount of Rupees 5000. The situation has been reviewed by the Corporate Affairs Minister Mr. Arun Jaitley. There were many genuine directors who could not complete their process”. The Institute of Chartered Accountants of India and several other corporate bodies had also made representations to the ministry, requesting them to extend the period of filing by another 15 days. “The website wasn’t functioning properly between 13 to 15 September. Also, there were glitches in uploading the digital signatures,” ICAI President Naveen ND Gupta wrote in a letter to the ministry.

MCA was in the process of deactivating the non-compliant DIN on account of non-filing of DIR 3 KYC when vide notification dated 20th September amended the Companies (Appointment and Qualification of Directors) Rules, 2014 to be called the Companies(Appointment and Qualification of Directors) Sixth Amendment Rules,2018 whereby the due date for filling KYC form was once again extended by another 15 days. The window is once again reopened from 21st September till 5th October. Along with the extension of due date, MCA also amended the Companies(Registration Offices and Fees)Rules, 2014 to be called the Companies (Registration Offices and Fees)Fifth Amendment Rules,2018 whereby it reduced the penalty of Rupees 5000 which was to be levied after the extended due date of filing the said eform. Now vide the amended rules a penalty of Rupees 500 shall be paid for filing made between 21st September to 5th October. After 5th October i.e. from 6th October, the filing fee for said form would be once again as initially prescribed of Rupees 5000.

Abhishek Jain at MUDS is of the opinion that “MCA’s intention behind the extension of the due date of filing the said eform is to facilitate the directors to provide their data for updating in the MCA registry. The motive is not to earn money by imposing a penalty because had that been the motive then extension that to twice in the due date of filing along with a reduction in penalty would not have been granted to the remaining directors. There were views that the MCA is supporting the Modi Government for 2019 elections as the penalty of Rupees 5000 collected from 21 lakh directors will go into the pockets of the government. The main intent behind the DIR 3 KYC move was to weed out fake names being listed as genuine directors. This was also a part of the government’s larger strategy to clamp down on shell companies.”

MCA is currently focusing - Muds

Once the defaulting companies are removed then automatically the active companies will only remain.
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