In this blog post, Saanvi Singla, a student of University Institute of Legal Studies, Panjab University discusses the concept of vanishing companies. This article highlights the meaning, legality and present scenario of vanishing companies.

Introduction

More than 3,000 listed companies have vanished over the past two decades. Even after enormous exercise and expenditure done by the Executive, Parliament, and High Court’s order, still, the investors continue to be hesitant. Over the past two decades, a gigantic number of companies have absconded with hundreds of crores of rupees from the investors. Despite the direction from Allahabad High Court some 15 years back, none of the investors have gotten a single penny.

Till date, three lists containing the names of 913 companies have been made after thorough examination: 161 companies in 2012, 604 and 148 companies in earlier lists, which the Coordination and Monitoring Committee, in its minutes of meetings, held in 2006 and 2007, stated that over 50 companies have been identified for involvement and the rest, are under the scanner. However, we never got any response after this, and no company has been added subsequently in the list[1].

What is a vanishing company?

Vanishing companies are companies which raise funds from public through Initial Public Offers (IPOs) and afterwards fail to satisfy the listing/ filing requirements of the Registrar of Companies (ROC) and the Stock Exchanges for a continuous period of two years or more and are not found at their registered office address at the time of inspection which is done by authorities / Stock Exchange.

Thus, a company can be declared to be a vanishing company, if it is found to have:

• Failed to file the company’s return with the Registrar of Companies (ROC) or with the Stock Exchange (if it continues to be a listed company) for a continuous period of two years or more;
• It is not being maintained at its registered office whose address has been notified with the Registrar of Companies/ Stock Exchange; and
• None of its Directors are detectable.

All the three conditions mentioned above have to be satisfied before a company can be declared as a vanishing company.

Laws applicable to vanishing companies

The norms for the identification of a vanishing company have been established by the Coordination and Monitoring Committee (CMC) – a joint system formed by the Securities Market Regulator, Securities and Exchange Board of India (SEBI), RBI and the Ministry of Corporate Affairs (MCA) – established by the Government of India in 1999. We do not have any formal definition of vanishing companies under the Companies Act, 2013. But Section 447 of the Companies Act, 2013 provides for the punishment for fraud and other relevant provisions contain punishments for different types of default. Section 450 also been provided for the punishment of crimes which have not been specified in the Act. Though investments made in equity cannot be recovered from the respective companies as it is considered as risk capital, the directors/ promoters of such fraudulent companies are customarily debarred from accessing the capital market again. Further, FIR and prosecution proceedings can be carried out under the Indian Penal Code.

Originally CMC was authorized with the task of overseeing the status of vanishing companies as well as keeping a record of the action that has been taken by the regulators against the promoters/directors of such fraudulent companies which have utilized or embezzled the proceeds of the IPOs organized during the period 1992-95.

If a declared vanishing company afterward starts filing its returns etc. it is no longer considered as a vanishing company and is subjected to an exclusive monitoring by being kept on a ‘watch list.’

The term vanishing company has also been used by the central bank – RBI. Whenever a company including a Chit Fund or a Non-Banking Financial Company (NBFC) disappears after accepting the deposits from the general public, RBI has declared such fraudulent companies as vanished companies. A list of such companies has been declared on official website of RBI. Till now, RBI has declared more than 1,550 NBFCs as vanished. The matter concerning the vanishing companies has been referred by RBI to the Economic Offences Wing of the concerned State Government to investigate the case and take legal action which includes penal action as per the Indian Penal Code and Criminal Procedure Code, as presumed appropriate. In cases of frauds that have been committed by multi-level marketing schemes, since these are covered under the Prize Chit and Money Circulation Banning Act 1978 and watched by the State Governments, the cases are usually sent to the State Police Department. Economic Offences Wings of State Government has to take action against these firms under the Prize Chit and Money Circulation Banning Act, 1978.

When such companies have been registered under the RBI Act as NBFCs, then they will be under the regulatory purview the RBI. The Bank has been empowered under the Statute (RBI Act, 1934) to issue Prohibitory Orders to stop acceptance of deposits, and criminal proceedings can be initiated against such registered companies[2].

Present scenario

No major decision has been taken by the present central government regarding these types of companies. The list of the vanished companies stands where it was in the year of 2006-2007, and it declares only 78 companies as vanished companies. It has been estimated that 39,000 crore rupees have been embezzled till date through vanishing companies but sadly we do not have any record to estimate the loss that has been suffered by the citizens of this country. Not a penny has been retrieved by the government. After spending so much money, energy, resources, and time, the judiciary, executive or the legislature have not been able to arrive at concrete decisions.

The government needs to do something and take appropriate action to check the menace of vanishing companies. Otherwise, such companies will keep on flourishing throughout the country, and the people will keep getting scammed.

Footnotes:

[1]http://www.moneylife.in/article/vanishing-companies-and-the-unending-fight-of-investors-to-recover-money/40126.html

[2]http://www.arthapedia.in/index.php?title=Vanishing_Companies