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How To Prevent The Great Vanishing Act

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Of about 900,000 companies registered in India, 220,000 have not filed the mandatory annual reports, balance sheets and other supporting documents with the registrar of companies (RoC) for the past five years. Many of these are believed to be companies owned by fly-by-night promoters who raised money and fled. Even though the RoC has struck off 98,164 of such firms from its registers in the past three years on completion of investigations, protecting shareholders' interest continues to remain a pipedream in the absence of a stringent law.

The new Companies Bill promises radical reforms. Sources in the corporate affairs ministry say once the Bill meets the businessmen's long-pending demand for introducing the concept of dormant companies, the RoC will get cracking on wilful defaulters. Promoters of dormant companies do not need to file balance sheets and annual reports. The main reason why promoters keep companies afloat long after they have served their purpose is the tedious process of winding up a company. As Surjit Singh, a textile mill owner in Ludhiana says, "It helps business; we can save our patents, technological investments and intellectual rights."

However, experts are still unsure about the ability of the Companies Bill to tackle rogue businesses such as vanishing companies. Pradeep K. Dhingra, a Delhi-based chartered accountant, says that the provisions of Indian Penal Code should be used to tackle them.

Between 1992 and 2001, during the initial stockmarket boom, 238 companies were identified as vanishing companies, but only 117 companies could be traced. "There were always provisions of taking these companies to task," says Rajan Gupta, partner with FoxMandal Little. "It is about how governments use them."

(This story was published in Businessworld Issue Dated 24-08-2009)