Are Private Companies Promoters’ Private Affair?

Revenue Secretary Hasmukh Adhia on April 29^th brought into public domain something that is well known to the corporate professionals, 8-9 lakhs of the 15 lakh registered companies in India do not file their annual return with the Ministry of Company Affairs.

A brief review and enquiry for this wide-spread non-compliance reveals three specific reasons, which is listed in the ascending order of its prevalence:

• It is arduous and time consuming to file the annual return: A possible reason for this is the need to fill in more than 500 data points in Annual Return.
• Companies that do not file annual returns are not penalized: Companies and the officers of companies that fail to file annual returns are liable to penalty. The penalty ranges from a minimum of Rs.1 lakh to Rs.10 lakh. However in reality, these penalties remain only on paper and have not been levied. The result, non-compliant company do not pay a price for their non-compliance.
• Private companies are private affairs and there is no need to make private information public

What’s more, these reasons are not just prevalent among the lay public and uninformed company promoters, but large section of the corporate professionals too believe in one or more of these reasons. The belief that private limited companies are private affairs and do not have any duty to disclose any of their information to the public is the most dominant one. Given this wide-spread non-compliance in India, the question –‘Are Private companies, promoters’ private affairs?’ need a fresh evaluation.

Given the socially accepted view that private affairs need not be publicly disclosed, we need to see when private affairs become public?  A logical point at which private affairs become public is when a private individual voluntarily becomes a public figure like a politician or a celebrity and needs fame and recognition to be successful in their public life. By selectively sharing their private life with the public when it is beneficial to them, they often lose the right to retain their privacy on other matters that are inconvenient to them.

Another aspect that makes a private affair public is when special benefits are provided to an entity that is denied to a private person. Companies including private companies are entities that enjoy special benefits of limited liability that is denied to a private entity like an individual or a partnership. Further companies are also taxed as a distinct entity, which is a special privilege provided by the society though its legislation. While these are the benefits enjoyed by the company, the society also pay a cost for providing these benefits, which increases disproportionately when a company becomes non-compliant.

Our revenue secretary was viewing one element of this disproportionate cost when he spoke of non-compliant companies being vehicles of money laundering. There are other elements of cost too –the prominent two being: taxes legitimately ‘evaded’ or planned which is politically the right term when company structure is used in inheritance tax/ estate duty planning, or income structuring or wealth management to reduce the incidence of inheritance tax, wealth tax or income tax on individuals. However, the price paid for according limited liability to private companies is the most expensive cost socially, as the more vulnerable sections of the society –employees, small suppliers and service providers are the one who bear the brunt, having their legitimate dues unpaid. The only protection offered in law is the liberal disclosures provided to all stakeholders on the Company’s financial state of affairs. This would provide a warning to the stakeholders dealing with the company.

While partnership deed and its financial statements are private documents, as they are concerned with the private affairs of their partners, the Memorandum of Association, Articles of Association and the corporate financial statements are public documents by virtue of the special privileges provided to the company.  Given this, all companies, both private company and public company are public affairs, and a company and its directors have both a social and a legal duty to disclosure all information to public starting with the annual return.

Given this, we believe the only way to ensure corporate compliance is for non-compliant companies to be penalized by enforcing the prevailing law. By doing this, government would not only realize valuable resources for its social programs by collecting penalty from non-compliant companies but also create a conductive climate for a less restrictive regulatory regime that promotes ease of doing business in India. For, as Lord Shang the 3^rd century BC Chinese political commentator noted it is certainty of law enforcement that nips non-compliance in its bud and creates a compliant society.