Vanishing Companies are those companies which raised funds from public through initial public offers (IPOs) and subsequently failed, inter-alia, to comply with the listing/ filing requirements of Registrar of Companies (ROC) and the Stock Exchanges for a period of two years and were not found at their registered office address at the time of inspection done by authorities / Stock Exchange.
Thus, a company would be deemed to be a vanishing company, if it is found to have:
- Failed to file returns with Registrar of Companies (ROC) or with Stock Exchange (if it continues to be a listed company) for a period of two years;
- It is not maintaining its registered office at the address notified with the Registrar of Companies/ Stock Exchange; and
- None of its Directors are traceable.
All the three conditions mentioned above would have to be satisfied before a company is declared as a vanishing company.
The criteria for “vanishing companies” are identified by the Coordination and Monitoring Committee (CMC)- a joint mechanism between the securities market regulator, Securities and Exchange Board of India (SEBI), the central bank, RBI and the Ministry of Corporate Affairs (MCA) - set up by Government of India in 1999. Otherwise, there is no formal definition of vanishing companies in the Companies Act, 2013. However, Section 447 of the Companies Act, 2013 provides for punishment for fraud. In addition, other relevant provisions contain penal provisions for default. Section 450 also provides for punishment where no specific penalty or punishment is provided in the Act. Though investments in equity cannot be recovered from companies as it is risk capital, the directors/ promoters of such companies are generally debarred from accessing the capital market again. Further, FIR and prosecution proceedings are carried out under Indian Penal Code.
Originally CMC was entrusted with the task of monitoring the status of vanishing companies as well as action taken by the regulators against the promoters / directors of such companies which had misutilized or misappropriated the proceeds of the IPOs conducted during the period 1992-95. However, CMC now identifies vanishing companies on an ongoing basis. The original criteria identified by the CMC for identifying companies as “vanishing companies” were the following:
- Companies which have not complied with listing requirements/ filing requirements of Stock Exchange/ ROC respectively for a period of 2 years.
- No correspondence has been received by the exchange from the company for a period of two years.
- No office of the company is located at the mentioned registered office address at the time of Stock Exchange inspection.
This was revised to the present criteria in the meeting of the CMC held on March 04, 2008.
The list of vanishing companies listed by MCA can be seen here. The list maintained by Bombay Stock Exchange may be seen here. In addition, this information is also maintained on the online platform for investors known as "Watchoutinvestors.com". watchoutinvestors.com is a national web-based registry covering entities including companies, intermediaries and individuals who: (a) have been indicted for an economic default and/or have been non-compliant of laws/guidelines and/or are no longer in the specified activity.
If a declared vanishing company subsequently starts filing its returns etc. it is no longer regarded as a ‘Vanishing Company’ and is subjected to a special monitoring by being kept under a ‘watch list’.
The term vanishing company is also used by the central bank - RBI. Whenever a company including the Chit Fund or a Non-Banking Financial Company (NBFC) vanishes after accepting the deposits from the public, RBI has declared such companies as vanished companies and has placed the list of such companies on its website. So far, RBI has declared more than 1,550 NBFCs as vanished.
The matter of vanishing companies is referred by RBI to the Economic Offences Wing of the concerned State Government to investigate the case and take legal action including penal action as per the Indian Penal Code / Criminal Procedure Code, as deemed appropriate. In cases of frauds committed by multi level marketing schemes, since these are covered under the Prize Chit and Money Circulation Banning Act 1978 and monitored by the State Governments, the cases are sent to the State Police Department and Economic Offences Wings of State Government to take action under the Prize Chit and Money Circulation Banning Act 1978. Where such entities are companies registered under the RBI Act as NBFCs and under the regulatory purview of the Bank are involved, the RBI is empowered under statute (RBI Act 1934) to issue Prohibitory Orders to stop accepting deposits or / and alienating their assets, and criminal proceedings can be initiated against the registered companies.