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Centralised facility speeds up removal of defunct companies

The removal of defunct companies from official records has gained pace under a new centralised facility the government set up in April, boosting the massive clean-up drive. According to official data, there are more than 2.4 million registered companies in India but only about 1.5 million of them are active.

Data from the ministry of corporate affairs showed that in November alone, more than 1,170 companies were struck from official records, after more than 1,730 in September and more than 1,140 in August. (No companies were removed in October as the process is not conducted every month.)

These companies are dissolved under a key provision in the Companies Act, either for not starting operations within a year of incorporation or for not carrying out any economic activity in the preceding two years. This provision also covers the voluntary closure of companies, in which the regulator’s approval is sought after extinguishing all liabilities.

This function was, until April, exercised by the appropriate Registrar of Companies (RoC). That month the government rolled out the Centre for Processing Accelerated Corporate Exit (CPACE) to make the process centralised and uniform.

Under the new system, businesses that wish to discontinue operations can secure dormant status upon request while retaining their registration. Although the authorities make provisions for the company to realise all dues and pay off its liabilities before closure, any liability of shareholders, and managers and directors who wield management powers will be enforced even after the company is removed from the records.

The accelerated exit facility brings relief to entrepreneurs, given that almost 150,000 companies are formed every year and some never take off for various economic reasons. Experts say ‘ease of exit’ is a factor that weighs on investment decisions, too. For the authorities, removing defunct businesses from official records makes the corporate registry more manageable and improves regulatory oversight.

Separately, the government has allowed the incorporation of companies and limited liability partnerships (LLPs) under its national single-window system (NSWS), which offers various central and state approvals in one place, in addition to the incorporation facility available under the ministry’s MCA21 portal.

NSWS hosts applications for approval from 31 central government departments and 22 state governments, which entrepreneurs can secure without having to go to individual ministries and state governments. Besides, the ministry has done away with approvals for several disclosures under the Companies Act and has said mere acknowledgement for online filing is sufficient.

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Updated: 28 Nov 2023, 05:26 PM IST

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