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Corporate cleansing - a double edged sword

Published: 03 Feb 2018

As it widely known, the Ministry of Corporate Affairs (‘MCA’), in a major crackdown has de-registered 2,26,166 companies and disqualified all their directors (more than 300,000) in 2017.

After receiving representations from various de-registered companies and disqualified directors, government has introduced a scheme with the intent to provide defunct companies an opportunity to remedy the defaults of non-filing and other compliance issues.

However, this is only one side of the story.

On the other hand, Indian corporate world is witnessing a spree of resignations by independent directors owing to the snowballing compliance burden in the wake of recent rulings and regulatory scrutiny being intensified like never before. 

If this tendency endures any further, there is great risk of Indian companies facing unavailability of a number of qualified individuals / professional luminaries to act as independent directors. It will certainly make companies’ life tough to get talented independent directors on the board. Government actions may, thus, be counterproductive to the stated objective to maintain / instill transparency in corporate governance.

Existing independent directors are forced to create trusts to safeguard their personal assets with dread of trailing their assets for the fraudulent acts of the companies they are associated with. Certain legal experts have opinied that this practice of creating trusts to safeguard the personal assets is not recommended mode to preserve assets as directors may lose absolute ownership over their assets.

Government efforts to clean up the corporate system by removing the fraudulent companies and persons with the objective of creating a system of transparency and accountability is certainly laudable.

At the same time, the government needs to come up with right measures to defend sincere stakeholders from not getting agonized due to the cleansing of corrupted corporate system or else all government efforts can prove to be counterproductive and will not cleanse the corporate system - in its place inflict long lasting damage to honest stakeholders at professional as well as personal level.

Research and inputs by Paruchuri Baswanth Mohan

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.

Bhumesh Verma

Firm: Corp Comm Legal
Country: India

Practice Area: Contract

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