The System Is Not Taking Your Name

A Cheque That Would Not Clear

The call came on a Tuesday morning in September 2017, from the State Bank branch on Old Pune–Mumbai Road. My client made corrugated cartons in Bhosari, the kind that hold refrigerator compressors and two-wheeler spares on their way out of the industrial belt, and in nineteen years of business he had never missed a delivery date. He was standing at the counter with a cheque for a paper supplier. The amount was ₹3,80,000. The cashier had looked at her screen, looked at him, and pushed the cheque back across the counter.

'Madam, they are saying my DIN is not active,' he said. 'What is DIN?'

He knew what it was, of course. He had obtained his director identification number years earlier, when he converted his proprietorship into a private limited company, and he had signed forms bearing it ever since. What he meant was something closer to: how can eight digits I have never thought about stop me paying for paper?

The answer lay in a second company. In 2011 he and a cousin had incorporated a small private limited company to bid for a packaging contract with a public sector undertaking. The tender was withdrawn. The company never traded, never opened more than a token bank account, and after its filings for 2012–13 it simply went quiet. Nobody closed it. Nobody filed for it either. It sat in the Registrar's records the way an unpaid electricity connection sits in a municipal ledger: forgotten by the owner and remembered by the system.

Two provisions of the Companies Act, 2013 then did exactly what they say. Section 248 allows the Registrar of Companies to remove a company from the register if it has not carried on business for two immediately preceding financial years and has not applied for dormant status. Section 164(2)(a) provides that a person who is or has been a director of a company which has not filed financial statements or annual returns for any continuous period of three financial years is not eligible to be reappointed as a director of that company, or appointed in any other company, for five years. The section contains no test of intent. It asks only whether the documents arrived.

In 2017 the Ministry of Corporate Affairs decided, for the first time at scale, to act on these provisions together. The Registrars issued notices under Section 248 through the spring and early summer, and by September roughly 2.26 lakh companies had been struck off. The Ministry then published lists of directors disqualified under Section 164(2), totalling about 3.09 lakh people, and deactivated their DINs on the MCA21 portal. Banks were asked to restrict operations on the accounts of struck-off companies. The disqualification did not stay with the dormant company. It followed each director into every board on which he sat, which is how a tender vehicle that had done nothing since 2013 reached into a working carton business and froze its signatory.

The scale was announced as a campaign against shell companies, and some of those 2.26 lakh entities undoubtedly were shells, kept alive to move money that could not explain itself. I do not doubt that. But I spent the following six months in the offices of the other kind: a retired engineer in Aundh who had resigned from a family company in 2014 without anyone filing his DIR-11; two sisters in Kothrud whose late father's firm had never been wound up; and a caterer in Pimpri who had lent his name to a friend's venture and could not remember signing anything. Their files looked, to the portal, exactly like the shells. A database records filings, not reasons.

My client eventually recovered his DIN, through a scheme the Ministry introduced the following year, and that recovery belongs to a later chapter. That Tuesday he wanted only to know whether his supplier would be paid by Friday. I told him it would not. Then I asked him to read me exactly what the cashier had said.

'Sir, the system is not taking your name.'

What the Word Means in Law

'Compliance' is used loosely in Indian boardrooms. I have heard it mean honesty, caution, paperwork, the person who handles paperwork, and once, from a promoter in Wakad, 'the madam who says no'. For the purposes of this book it means something narrower. Compliance is the performance of an obligation imposed on an identified person by a statute, rule, regulation or notification, by a stated date, in a form that can later be proved. The obligation has a legal source, it falls on someone in particular, and it leaves a document behind. If any of those elements is missing, whatever is being discussed may still be worthwhile. It is simply something else.

The narrowness matters because three neighbouring ideas are constantly confused with it.

Ethics is the question of what a business ought to do. The law answers part of that question and leaves the rest alone. My carton maker was, by any ordinary standard, an ethical man: he paid his suppliers, his workers and his taxes, and he had never knowingly told the state anything untrue. His dormant company was nonetheless in default for three years, because Section 92 of the Companies Act, 2013 requires an annual return every year whether or not the company has anything to report, and Section 137 requires financial statements to be filed with the Registrar in the same way. Good character does not file an MGT-7. The reverse also holds. A company can be scrupulously compliant and still behave badly in ways no statute reaches.

Governance is the system by which a company is directed and supervised: who decides, who checks the decision, and how the board learns what management is doing. Parts of it are written into law. Section 149 requires certain companies to appoint independent directors, and Section 177 requires certain companies to constitute an audit committee. Much more of it is recommended rather than required, in codes, committee reports and the habits of well-run boards. Where governance has been legislated, it becomes compliance. Where it has not, it remains advice, however sensible. Throughout this book I mark the boundary each time: 'the Act requires' means a court or a Registrar can act on it; 'I advise' means I think you should, and nobody will penalise you if you do not.

Risk management is the discipline of anticipating loss and deciding what to do about it. The Act touches it at one precise point. Section 134(3)(n) requires the board's report to include a statement on the development and implementation of a risk management policy. The legal obligation is to make the statement. Nothing in the clause requires the policy to be any good, and I have read board reports in which the paragraph was copied, typing errors included, from the previous year's report of a different company. That paragraph was compliant. Whether the company managed its risks is a separate matter, and usually a more expensive one to discover.

One further distinction catches people out. Compliance is not the same as filing. A return lodged on time that contains false figures is a fresh default, and a serious one: Section 448 makes a knowingly false statement in any return, report, certificate or financial statement punishable under Section 447, the fraud provision. Satyam's annual filings reached the Registrar on schedule for years. The record was punctual and wrong. The law requires the document to arrive, and it requires the document to be true, and it treats the second requirement as far graver than the first.

The definition I am using is therefore deliberately unromantic. It does not ask whether a company is admirable, well led or prudent. It asks whether the obligations that bound it were met, by the people they bound, on the dates the law fixed, and whether a stranger opening the file years later could see that they were. In 2017 the Ministry asked exactly that question of every company on the register, and it read the answers mechanically.

When I explained this to the carton maker that week, he was quiet for a while. Then he said, 'So the company was honest, only it was not present.'

The Default Cascade

The first consequence of a missed filing is almost nothing at all, and that is what makes it dangerous. A company that fails to lodge its AOC-4, the form by which financial statements reach the Registrar, within thirty days of its annual general meeting is not stopped, warned or visited. The portal simply records the delay and begins to count. Under the Companies (Registration Offices and Fees) Rules, 2014, as amended with effect from 1 July 2018, every late form carries an additional fee of ₹100 for each day of delay, on top of the normal filing fee, with no upper limit. The same applies to the MGT-7 or MGT-7A annual return, due within sixty days of the AGM.

A hundred rupees a day sounds like a parking charge. It is meant to. Consider a small private company with a nominal capital of ₹1 lakh whose director forgets both forms for a single year. The normal fee for each is a few hundred rupees. A year late, each carries roughly ₹36,500 in additional fees. The two forms together, for one year of forgetting, cost about ₹73,000 before anyone has been penalised for anything. I have had clients pay that sum without argument, because it arrived as a portal figure and not as a demand from a person.

The second consequence is the penalty itself, which is a separate thing from the fee. Section 137(3) of the Companies Act, 2013, in its form after the 2019 amendment, makes the company liable to a penalty of ₹10,000 and a further ₹100 for every day the default continues, up to ₹2 lakh, and makes the managing director, the chief financial officer or, failing them, the directors personally liable to the same daily rate up to ₹50,000. Section 92(5) does the same for the annual return. These penalties are adjudicated by an officer of the Registrar, not a magistrate, a shift whose significance belongs to the final chapter. For present purposes the point is arithmetical. The fee and the penalty run in parallel, and the penalty falls partly on individuals.

The third consequence changes the nature of the problem. If the default continues for three consecutive financial years, Section 164(2)(a) disqualifies every person who was a director of the company during that period from being appointed or reappointed a director of any company for five years. Section 167(1)(a) then makes the disqualified director vacate office. Since the proviso inserted by the Companies (Amendment) Act, 2017, he vacates it in every company except the defaulting one, which is to say the healthy companies lose him and the sick one keeps him. The Ministry gives effect to this by flagging the DIN, and a flagged DIN cannot sign an e-form. The director cannot file the very returns that would cure the default.

From there the cascade leaves the Ministry's portal and enters other people's systems. A bank that operates a company account on the authority of a board resolution will check that its signatories are validly in office. When the Registrar's master data shows a director disqualified, the mandate fails, as it did for the carton maker at the counter. Lenders review sanctioned limits. Insurers ask questions at renewal. None of these institutions has any interest in the original AOC-4. They are reading the record, and the record says the signatory has no authority.

The last link is usually the one that costs real money. Public procurement asks bidders to declare that no director is disqualified and to supply current company master data. In 2018 a sheet-metal fabricator in Bhosari MIDC, a client I had not yet acquired, was declared technically non-responsive on a municipal tender worth about ₹1.4 crore. His bid was the lowest. One of his three directors also sat on the board of a defunct trading company in Nigdi that had not filed since 2014–15, and the tender committee had downloaded the MCA data and seen the flag. He showed me the rejection letter some months later. It ran to four lines, and it did not mention the price.

Who Reads the Record

The carton maker's first instinct, once the shock had passed, was to ask who had complained about him. Nobody had. That was the part he found hardest to accept. He had imagined a rival, or a disgruntled former employee, or an officer with a grudge, because a consequence that large seemed to need a person behind it. There was no person. There was a database, and a great many people who consult it without ever announcing themselves.

The first of them is the lender. When a cooperative bank on Laxmi Road considers a working-capital limit for a small company, the credit officer does not begin with the proprietor's handshake. She downloads the company master data, reads the last three AOC-4 filings, and checks the register of charges, because Section 77 of the Companies Act, 2013 requires every charge over company assets to be registered with the Registrar in Form CHG-1 within thirty days of its creation. A charge that was never registered is, for most purposes, invisible to the liquidator, and a lender who relies on it may find itself an unsecured creditor. The officer has never visited the factory. She is lending against the file.

The second is the auditor, who is a stranger by design. Section 141 disqualifies from the role anyone with a close financial or personal tie to the company, and the effect is that the person certifying the accounts arrives knowing nothing the documents do not tell him. He reads the minutes, which Section 118 requires to be kept and signed, and which are presumed to be evidence of what they record. If a loan was approved at a board meeting that was never minuted, the auditor has no way to know that the board approved anything at all.

The third is the employee, who reads the record without usually thinking of it as one. A machine operator in Bhosari who opens the passbook attached to her Universal Account Number on the provident fund portal is checking, month by month, whether her employer deposited what it deducted from her wages. She cannot see the company's books. She can see whether the deposit arrived. I have sat with workers who trusted an employer completely until the passbook showed a gap of seven months, and after that trusted nothing the employer said.

The fourth is the tax officer, who now reads almost entirely by machine. TDS deducted by a company appears in the payee's Form 26AS only if the company has deposited it and filed its quarterly return. Input tax credit claimed by a buyer under GST depends on the seller's GSTR-1, a dependency the seventh chapter follows to a textile trader in Kolhapur. In both systems, one party's filing becomes another party's evidence, and a single silence propagates down the chain.

None of these readers was in the room when the company made its decisions. Each of them acts on what the room wrote down. This is the sense in which I call compliance the company's memory: it is memory kept for people who have no other access to the past.

The recurring dates introduced in this chapter are few but foundational. The AOC-4 falls due within thirty days of the annual general meeting, the MGT-7 or MGT-7A within sixty days of it, and any charge must be registered in CHG-1 within thirty days of creation. Every later chapter adds to this short list.

The idea that a company owes strangers a written account of itself is not modern, and it did not begin with a portal. In 1850 the Governor-General in Council passed Act XLIII, the first general statute in India allowing joint stock companies to register, and its central demand was that their particulars be lodged where outsiders could read them. It was modelled on an English Act of 1844, which had itself been passed after a parliamentary committee spent two years examining fraudulent companies. The registry began, as most of Indian company law would, as an answer to a failure.