Vanishing Company: Companies Act, 2013 failed to define Vanishing company but it is a term being widely used both inside and outside government for referring to companies who have just vanished and remain untraceable.
In a recent response to a parliamentary question, the ministry of corporate affairs (MCA) said that no foreign company between the 31 March 2011 and 31 March 2016 had been categorized as a vanishing company. However, as on date 161 vanishing firms have been identified by the government.
Criteria for identification of a vanishing company:
A company is deemed to be vanishing company, if it is found to have :
Failed to file returns with Registrar of Companies for a period of two years.
Failed to file returns with Security exchange for a period of two years (if it continues to be a listed company)
It is not maintaining its registered office of the company at the address notified with the Registrar of Companies/Stock exchange; and
None of its directors are traceable.
All the criteria mentioned above would have to be satisfied before a listed company is declared as Vanishing company.
The conditions mentioned at 1,3 and 4 would suffice to declare a company as vanishing if such company has been de-listed from the Stock exchange.
Who identifies Vanishing Companies?
Coordination and Monitoring Committee under Ministry of Corporate Affairs identifies vanishing companies.
Constitution of Coordination and Monitoring Committee (CMC):
CMC is a joint mechanism constituted in 1999 between the securities market regulator, SEBI, MCA and RBI.
Challenges with Vanishing Companies:
Vanishing Companies are a kind of fraud.
These companies undermine the security and bond market.
These lead to low participation in Initial Public offers of the company which is detrimental for both the market at large and the issuing company in particular.
Vanishing companies cheat people of their hard earned money and thus cause social, psychological and mental problems to people.
Inability to catch such companies at time, create mistrust towards the government which lead to legitimacy crisis for the state which manifest at times in the form of protests and strikes.
Safeguards against Vanishing Company as per Companies Act, 2013:
Ministry has made it mandatory for the professionals to verify details of the company in case of incorporation of a new firm or change of address of an existing firm.
Registrar of Companies scrutinise the balance sheet and other records of the firms that raise money through public offers and monitors the utilisation of such funds.
On identification of any firms as vanishing firm, action is initiated in accordance to both Company law and Criminal law.
RBI declares a list of Chit Funds and NBFCs who vanish after taking deposits from the public.