The registration of companies has halved in the first five months of this financial year, with some analysts blaming it on cumbersome compliance requirements of the new companies act. 

The number of companies that were registered in April-August fell to 21,260 from 43,000 a year earlier, according to official statistics. The cumulative authorised capital of companies registered in the first five months declined toRs 7,500 crore from Rs 20,500 crore. 

The Companies Act, 2013, which came into force in April, replacing a 58-year-old law, was aimed at facilitating business-friendly corporate regulation, improving corporate governance norms, enhancing accountability on the part of companies and auditors, raising the levels of transparency and protecting the interests of investors, especially small investors. 

"The implementation of the new act has impacted both large and small businesses, albeit in different ways, and this is also possibly resulting in a lesser number of new companies being set up," said Sai Venkateshwaran, a partner and head of accounting advisory services at KPMG in India. 

New rules including those requiring directors to obtain digital signatures before applying for a Director Identification Number, business licenses for private companies, additional documents such as no-objection certificates from relatives and other partners for approval of names and a fixed financial year have made setting up companies more cumbersome, especially for small businesses. Previously, private companies were allowed to accept deposits or loans from relatives of directors, which the new act has curbed. 

"Due to lack of clarity in the new act, stringent duties of directors and requirement of various approvals, including related-party transactions and increased fines and imprisonment penal provisions being incorporated in the new act, the registration of companies has dropped significantly," said Sharad Vaid, a partner at law firm Khaitan & Co. 

The ministry of corporate affairs, which is tasked with the administration of the Companies Act, 2013, and other laws regulating the functioning of the corporate sector, is looking to simplify the registration process. 

"We are aware of the issues... We are looking at how best to address them and are also holding meetings with stakeholders including industry chambers to review the situation," said a senior corporate affairs ministry official. 

Experts say larger companies are impacted by the requirements of the new law on intercompany transactions, including loans between related parties, while smaller companies are affected by tedious compliance requirements that are currently applicable equally to both private and public companies, including fund raising. Analysts expect larger companies to opt for restructuring. 

"In case of larger corporates, one expects to see more rationalisation of entities within a group and also parts of growth in businesses being structured as divisions rather than as separate entities, thereby eliminating intercompany related-party transactions by making them intra-company transactions," Sai of KPMG said. 

Smaller businesses are in a wait-and-watch mode as several provisions of the 1956 Act have not been carried forward. 

"Under the previous law, small companies could choose their own financial year and were not required to have a resident director at the time of incorporation and also there was no need to file additional documents in the form of affidavits, declarations and proposed registered office address. 

All this is not there in the new act, due to which setting up companies has become more cumbersome," said Rakesh Nangia, Managing partner of Nangia &Co. Experts say the new law has blurred the lines between private and public companies, prompting many to wait for further clarity from the government. (Economic Times)