Corporate cleansing - a double edged sword

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.