New KYC process likely to eliminate many ghost directors from the system

New KYC process likely to eliminate many ghost directors from the system

The MCA officials claim that out of 33 lakh directors, only 12 lakh had completed the KYC process for free, by the last date of 15 September.

In yet another attempt to curb the creation of black money and shell companies, the government has now cracked the whip on company directors who failed to comply with the KYC norms by 15 September.

The MCA officials claim that out of 33 lakh directors, only 12 lakh had completed the KYC process for free, by the last date of 15 September. The government is now looking to deactivate 21 lakh directors identification numbers (DINs).

However, all is not lost. Those directors who have not been able to complete the process can still do so by paying a fee of Rs 5,000.

In a statement issued on 16 September, the MCA said: "As you are aware the last date for filing form DIR-3 KYC without fee has expired on 15th September 2018. The process of deactivating the non-compliant DINs is in progress and is likely to be completed by 17 September 2018. Please note that the form DIR-3 KYC will not be available for filing during the pendency of this activity from 16-17 September 2018."

Though it seems the government may extend the date for KYC without fee by another 15 days.


So what was the purpose of the whole exercise? How does it help in cleaning the 'shell' companies?

The purpose is to get rid of the ghost directors -- those directors, who do not even know they are directors in companies. Some of them may be peon or drivers of the owners of a company. In some cases, the director could have been long dead but his/her name continues to appear in the list of directors.

Pavan Kumar Vijay, founder and managing director of advisory firm Corporate Professional, explains: "There are some 11.5 lakh companies registered with MCA. Out of these, 80,000 are public limited companies and the rest are private limited companies, which require just two directors. In many of these (private limited) companies, the proprietor of the company have made their driver, peon or cook as the director of the company to fulfil the regulatory requirements. Earlier, nobody cared to ask for their Aadhar or PAN. But now that this exercise has started many of such directors would cease to exist."

The documents required to file E-Form DIR 3 KYC are as follows:

a) PAN for Identity Proof

b) Aadhaar Card for Address Proof (Provided mobile number must be updated with UIDAI)

c) Latest passport size Photograph

d) Personal Mobile Number and E-mail ID of the director for the purpose of OTP Verification

e) DSC (Digital Signature Certificate of the director) which must be registered on MCA Portal.

f) Passport is mandatory in case of foreign national only

A continuous process

The circular issued by the MCA had stated that every director who has been allotted Director Identification Number (DIN) as on or before 31st March of a financial year should submit e-form DIR 3 KYC to the Central Government on or before 30 April of immediate next financial year. But, for the current year, DIR-3 KYC is required to be filed on or before August 31, 2018.

The 31 August deadline was extended by 15 days and it may be extended by another 15 days.

"Thus, the idea behind this exercise is transparency between the company, shareholders and most importantly the MCA," says Mamta Binani, ex-president of Institute of Company Secretaries in India (ICSI).

Practical issues

The MCA says that they have already given 60 days for the directors to complete the KYC process, but company law professionals say typically when you introduce a new rule, you must give 3 months to comply with it because of many practical issues faced in such compliances.

Of course one of the issues faced is slow MCA website but there are others too.

Amit Maheshwari, managing partner in chartered accountancy firm Ashok Maheshwary and Associates, says: "One of the conditions of the KYC process is physical verification of the directors through video conferencing. Some of the foreign nationals, who are directors in India-registered companies, have shown their reluctance for physical verification."

Mamta Binani says, "Many of the directors in private limited companies are really small time players, and cannot afford professional advice. They do all the compliances on their own, and they usually get to know about these changes in the last minute."


Need for extension

Why is there a need for extension of the date if the DIN can be reactivated anytime by paying a fee of Rs 5,000?

Mamta Binani says for many directors Rs 5,000 is no small amount for just one compliance, and hence she feels that there is a need for extension of the deadline.