Munmi Phukon, Principal Manager, Vinod Kothari & Company (firstname.lastname@example.org)
The country had witnessed the bulk of show cause notices sent to companies last year seeking evidence on their CSR expenditure, reporting, disclosure etc., though the Ministry’s stand on such notices and replies thereof is not yet known. After CSR, MCA has now seemed to shift its surveillance to the layers of Indian companies and recently started issuing show cause notices to the companies. As claimed in such notice itself, the basis of the same is the annual return filed by the companies. What concerns the most at this time is that, when most of the companies in the country are busy with convening the ensuing AGMs, the preparation/ documentation of bulky reports, aligning themselves with the recent amendments made in the corporate laws, be it the Companies (Amendment) Act, 2017 or the Listing Regulations, the show cause notice is posing as an additional burden.
A quick recap of the relevant provisions
MCA vide its notification dated 20th September, 2017 introduced the Companies (Restriction on Number of Layers), Rules 2017 under the proviso to section 2(87) of the Companies Act, 2013. The Rule was brought into effect for the purpose of restricting the maximum number of layers a company can hold based on the prescriptive power provided under the said proviso.
In terms of the said Rules, companies are restricted to have more than 2 layers of subsidiaries except one layer of wholly owned subsidiary(ies) which has been excluded from such limit. Further, companies have been allowed to acquire (which shall include a new incorporation too) a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.
What was the compliance requirement?
The Rules required the companies having more than 2 layers of subsidiaries to comply with the following:
- Filing of a return in Form CRL-1 with the concerned Registrar within one hundred and fifty days of the commencement of this Rule;
- Not to have any additional layers over and above the existing ones; and
- Not to increase the number of layers (in excess of 2) in case of subsequent reduction of layers by companies having more than two layers post enforcement of the Rules.
The Rules further provide that a contravention shall attract punishment on the company and every officer of the company who is in default by way of fine which may extend to ten thousand rupees and where the contravention is a continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which such contravention continues.
The show cause notice
It has been noticed that the Registrars have recently started sending notices to the companies, basis the data extracted from the annual return. However, what is now being witnessed from this act is something, which questions the sense of understanding of the provisions, as the very basis of considering/ alleging a company as defaulter can not only be the number of subsidiaries which it may have but the same should actually be the number of layers of such subsidiaries. It seems that the notice is only concerned about the former. Further, since the restriction on layers is for vertical propagations and not for horizontal propagations, a company may have as many number of subsidiaries horizontally. However, considering the show cause notices which are being sent based on the very fact of having two or more subsidiaries, the same shows the lack of clarity of the provisions.
As discussed above, as the very basis of the notice seems unclear, the companies may draft and send relevant replies stating their stand along with the group structure for better clarity.