COVID-19 outbreak: MCA measures for relaxations – is it sufficient?

COVID-19 outbreak: MCA measures for relaxations – is it sufficient?

Legal & Compliance

Makarand Lele

Makarand Lele

208 week ago — 14 min read

COVID 19 has badly disturbed the operations of the businesses all over the world. Mandatory Work From Home (WFH) is implemented since mid of March in many states and later for pan India. Government of India has released various measures granting financial and legal relaxations to businesses to combat with COVID 19 outbreak. Similarly Ministry of Corporate Affairs (MCA) has also announced certain relaxation measures to help companies and LLPs to sail through this difficult situation. It would be interesting to analyse these MCA measures for relaxations and to understand whether it is a sufficient discharge?


Businesses in India are saddled with various routine and event based procedural compliances under the Corporate Laws. MCA being a regulator is monitoring these compliances by ensuring electronic filing of returns, documents and forms to its MCA 21 system. There are stringent penalties and prosecutions for non-compliance. Every delay in annual filing for companies and for all forms of LLP is tolled with additional fees mostly at the rate of Rs 100/ – per delayed day.

In this background and due to lock out situation in India, stakeholders were expecting aggressive relaxation measures from MCA in the form of concession in additional fees, immunity and less processes.

MCA has till date issued following circulars/ notification relaxing compliances for businesses and tried to empower them to combat with COVID-19 outbreak.

1. Circular dated 24 March 2020 – Special measures for companies and LLP on account of COVID 19 outbreak. https://mca.gov.in/Ministry/pdf/Circular_25032020.pdf

2. Notification dated 26.3.2020 – extending applicability of CARO to FY 20-21  http://www.mca.gov.in/Ministry/pdf/Notification_25032020.pdf

3. Notication dated 28.3.2020 – extending monetary ceiling of default under IBC code to INR 1 Cr. – http://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf

4. Circular dated 30 March, 2020 – Companies Fresh Start Scheme 2020 – http://www.mca.gov.in/Ministry/pdf/Circular12_30032020.pdf

5. Circular dated 30 March, 2020 – Extension of LLP Settlement Scheme 2020 – http://www.mca.gov.in/Ministry/pdf/Circular13_30032020.pdf

It’s really a welcome, noble and prompt move from MCA to grant various reliefs to distressed businesses.

It would be interesting to not only understand the details of the circular but also to analyse its real meaning and impact

  • Relaxation to Companies and LLPs for ling belated documents without additional fees/ or reduced fees from 1 April till 30 September is provided through two Schemes. Such huge monetary relaxation of additional fees is a big move by MCA, post stiff increase in additional fees charging mechanism. This is likely to help defaulting companies to save cash reserves & to get a booster for “Fresh Start”. However in reality it would be interesting to observe whether these fresh start schemes will really provide a needed strength to business who are under lock down for uncertain period? Past analysis of response to any government scheme suggest that usual response time is last 15 days of end date of the scheme. Plus the scheme will naturally not cover the annual lings for the distressed financial year 2019-20, which usually falls due post September 2020. Having said this the moot question is that whether Fresh Start Schemes will really support businesses in current COVID 19 situation and will really help them to come out of this and enable them to regularize their functioning. The unfortunate answer is “No”. It could have been more appropriate for MCA to introduce these Schemes once the businesses are back to their offices and to normal functioning. Currently more distressed businesses are those who are generally “Compliant” in majority aspects. These Schemes unfortunately are not meant to take care of those “compliant businesses”.

  • There appears to be no reasonable ground to exclude certain forms from such schemes.

  • Scheme intends to grant immunity to defaulting companies on account of non-ling defaults if the same is made good by fling.

  • What is expected now from defaulting businesses and their consultants to come forward, review all pending ling, initiate documentation, roll over the process, prepare forms and returns and sign, certify and file it. And all this is expected to be done under mandatory WFH.

  • Was this a right time and sense to grant opportunity to “long standing non-compliant companies/ LLPs a Fresh Start”? Definitely not. As a responsible arm of Government of India, MCA is expected to provide a genuine support and help the businesses to undertake compliance with real “Ease of doing business”. Fresh Start opportunity is usually provided when things move to its normal phase and not when life of companies, directors and consultants are under threat and at stress.

  • Relaxation of charging of additional fees for all forms and returns irrespective of due dates under “Fresh Start process” is likely to lead to structuring of backdated corporate events. Companies Act 2013 & its various subsequent amendments have nicely shielded from structuring of such back dated transactions. However there is a threat that under the garb of this exemption, attempt would be made to structure and regularize such transactions. This may compromise various management stands and auditors statements made from time to time. Since majority of forms and returns are registered under Straight Through Process (STP) it would be difficult for regulator to identify such backdating attempts

  • Welcome relaxation was provided in compliance of gap between holding board meetings by the companies including earlier relaxation of transacting specified business through VC meeting. True relaxation could have been to hold board or committee meeting entirely through VC and relaxation of its stricter procedural norms till the time situation is resorted to normal. Further conducting and recording of such VC meeting through various apps like WhatsApp, Zoom meeting, Skype etc could have been permitted. This could have ensured proper compliance of Board meetings with “Ease of Holding” it. Rather it was a great opportunity for MCA to recognise such excellent 21 century platforms for holding meetings and to revise procedural rules of having physical presence of Chairman and Company Secretary.

  • Postponement of applicability of new CARO to financial year 1920-21 is a welcome step. But it is likely to be turnout to be nightmare for many companies to comply and Auditors to report. As we look forward we can apprehend that financial year 20-21 is likely to be the worst nancial year in the history of any company on account of disturbance to business and compliance of various applicable laws. New CARO provisions requires the company to identify various things and for auditors to comment on it. The most importantly, new CARO requires the auditors to opine on the following;

“Whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date.”

As it could be predicted, year 20-21 is going to be the most difficult year for companies to establish such capabilities of meeting liabilities and for auditors to opine on it. Most of the audit reports under new CARO for FY 20-21 are therefore likely to be qualified reports. This is definitely not a good situation for India Inc, in rejuvenation phase after burning out in COVID 19 effect. This could be very well avoided by postponing applicability of CARO to FY 21-22.

  • Holding of ID meeting could have been facilitated through VC instead of granting fractured exemption by allowing then to share their views through email or any other communication mode. Such sharing of views as we know, could not have binding effect on Board of the Company.

  • Companies will take several months to recover from Cash crunch. In this circumstances there is no possibility for a company to set aside necessary cash by end of June 20 to keep it separately in the Banking account to comply with Deposit Repayment Reserve or to invest in specified securities for maturing deposits. True relaxation could have been to grant exemption to the companies to comply such reserve or deposits or investments requirements by September, 2020.

  • Section 10A requires the companies to make declaration of receipt of subscribed share capital and maintenance of registered office as “declaration of commencement of business” within 180 days of its incorporation. Current exemption is only by extension of period of ling of such declaration by further 180 days. I am not sure whether the current form of exemption also grants immunity to company and directors from noncompliance liability stated in sub section (2) of Section 10A and whether there is an assurance to such companies from removal of their names from the register on account on non-carrying out its business?

Nevertheless, there are still some hopes to cover-up all unintentional mishaps, at the time of issuance of specific notifications by MCA to give effect to the exemptions casted in circular dated 24 March, 2020.

MCA could be implored to consider following true relaxation to enable compliant businesses to recover from COVID 19 suffering.

These suggestions are offered based on assumption that COVID 19 effect will continue for longer duration & will have greater impact on Indian economy. Even after it gets over, businesses will take quite some time to recover and restrictions on people’s movement will continue. Situations may demand adoption of WFH and Social Distancing policy.

MCA could;

  • Extend the period of resubmission of forms and documents.

  • Extend the period for submission of NCLT/ COURT orders in Form INC-28.

  • Extend the period of ling of forms, return & documents having no fees. (since the circular and scheme only states about waiver of additional fees)

  • Extend the period of name & other approvals granted or to be granted in lock down situation.

  • Quickly process all pending & arising cases for ling fees refund.

  • Quickly process and clear all approval based ( Non- STP) forms

  • Advise officials to instantly clear all pending forms, applications & pending cases.

  • Grant complete relaxation from procedural compliances stated in Secretarial Standard 1 & 2 for Board & General Meetings.

  • Grant complete permission to hold and pass all types of agenda items through VC or by circular resolution. Entire Section 179(3)

  • Extend the period of holding Annual General Meeting till December 2020 without any applications by the companies to the ROC.

  • Allow companies to hold Annual or other General Meetings through VC or webcast, overriding the provisions of physical presence of quorum.

  • Extend the Annual Filing deadlines to 3 months of holding AGM for financial year 19-20. (not just a waiver of additional fees)

  • Grant certain relaxation to company to borrow and lend money to overcome COVID crisis. Section 179, 180, 185 & 186

  • Relax various timelines stated in Deposit Rules. Rule 2(c) of the Companies (Acceptance of Deposit) Rules, 2014.

  • Relax the provisions by 1 year for disqualification of directors & vacation of office on account non-ling of annual return or financial statement for consecutive 3 years. Section 164 (2) (a) & 167 (1) (a).

  • Relax the provisions for removal of name of the company from records for no business for 2 years or failure to commence business within 1 year. Section 248 (1).

  • Further easing out formation of new entities

  • Granting excess period for issue of share /debenture certificates & for payment of stamp duties

  • Allowing companies to comply with CSR spending beyond 31 March.

  • Identify SME & Start up’s as “small companies” (by amending the definition) & can provide them certain special relaxations.

Most importantly & keeping in mind the true spirit and intention of MCA, it could grant Immunity to companies/ LLP/ directors/ partners from various prosecutions emerging out of possible and unintended non-compliance offences of various applicable provisions, if they establish that such non-compliance was unintentional and unavoidable

Clear assurance to stressed India Inc is needed for non-levy of penalties and nes and initiation of adjudication of offenses.

As a good gesture and support to COVID affected businesses and in order to ensure stability post COVID, MCA could announce “NO AMENDMENT WINDOW” of 1 year starting from April 2020 (except those, which are essential for providing relaxation)

Rather MCA can define new rules of game founded on Trust, intent & spirit of governance by the businesses than procedural compliances

We never know this may be a new dawn for new trust base corporate law regime for new corporate India, post COVID-19 effect.

Also read: COVID 19 – Smart survival for self & business

 

Image source: shutterstock.com


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Makarand Lele

Expert Advisor and Consultant for SMEs on the platform, specially to address queries on the impact of COVID-19 on business owners in India Core Strength - Positive...