Abstract
The Companies (Incorporation) Rules, 2014 have been amended by the MCA, and a new rule 25B has been added that allows the ROC to physically check the company’s registered office in order to confirm the legitimacy of the registered business. We all know that a company must have a registered office capable of receiving and acknowledging all communications and notices that may be delivered to it within thirty days of its incorporation and at all times thereafter, per section 12(9) of the Companies Act, 2013. This regulation is now in place to ensure adherence to this clause. This regulation went into effect on August 18, 2022, in accordance with this regulation to assure section 12 (9) The ROC may physically inspect the company’s registered office and conduct physical verification there to see whether the registered office is being maintained as required. All documentation submitted on the MCA portal pertaining to the company’s registered office can be checked by the ROC, and it can also examine any additional proof pertaining to that office, such as a rent agreement or other document.
Keywords: Registered Office, Shell Companies, Physical verification, Registrar of Companies, Rule 25B.
I. Introduction
As part of its ongoing endeavour to eradicate shell corporations and inactive businesses, the Corporate Affairs Ministry (MCA) has established recommendations to tighten the verification process after incorporation. The MCA has released the Companies (Incorporation) Third Amendment Rules, 2022.[1] The procedure for in-person verification of a company’s registered office is now fully detailed with the implementation of new Rule 25B.
It has been noted in several prior cases where businesses engage in illegal methods such as supplying fictitious addresses, attaching forged or fabricated documents as evidence of address, maintaining records and books improperly at the registered office of the business, and breaking the law.
Through the Companies (Incorporation) Third Amendment Rules 2022, Ministry of Corporate Affairs included new Rule 25B to address such misconducts. The MCA’s attempts to find and punish shell businesses operating in India are consistent with this trend. Furthermore, the adoption of Rule 25B gives the government another tool in its arsenal for conducting examination and cracking down on shell firms in light of its ongoing efforts and heightened inspection through the Enforcement Directorate in finding shell corporations.
A registered office of a corporation must be physically verified in accordance with the new legislation, in the presence of two witnesses who live in the same area as the registered office. If necessary, ROC can also get assistance with verification from the neighbourhood police.
The original documents that were filed with Form MCA 21 must always be on available for the Registrar to consult when he or she has to confirm the precise location of a company’s registered office.
To further verify the validity of the originals, “copies of supporting documentation of such address acquired during the said physical verification, completely validated by the occupant of the property where the said registered office is situated” should be used.
II. Critical analysis of Rule 25B of the Companies (Incorporation) Third Amendment Rules 2022
All businesses have a legal personality, which entitles them to the same rights as real people, including the ability to own property, keep bank accounts, conduct business, and file and defend legal actions. The majority of the businesses we deal with on a daily basis produce items or offer services; they have personnel, tools, and a physical location. However, shell firms don’t actually generate any goods or services; they are merely legal entities. They are identities that can be legally established or revoked in a matter of days for a sum ranging from a few hundred to a few thousand dollars.
A company’s registered address must be accurate, per the new Companies (Incorporation) Third Amendment Rules, 2022. This Amendment adds a new regulation 25B that addresses the topic of this Amendment, the in-person verification of the company’s registered office.[2]
Overview of Rule 25B:
The Companies Act of 2013’s Section 12[3] discusses the registered office of the firm, and its Sub-section (9)[4] refers to the physical verification of the registered office address. According to this, the Registrar of Companies may visit a registered office address if he has good reason to believe that the business being investigated is not operating legally. And the only justification for this Amendment is this physical verification.
A new Rule 25B with the heading “Physical Verification of Registered Office of the Company” has been added to the Companies (Incorporation) Rules 2014[5] after Rule 25A. The Companies (Incorporation) Amendment Rules, 2019,[6] which were inserted Rule 25A and are related to ACTIVE (Active Company Tagging Identities and Verification), were announced by the Government of India through the Ministry of Corporate Affairs on February 21, 2019, and they became effective on February 25, 2019. Rule 25A, which discusses the confirmation of the registered office, was added after Rule 25.
In accordance with section 12(9) of the Companies Act, 2013,[7] the Registrar may physically inspect a company’s registered office in the manner that may be prescribed if they have reason to believe that the business is not being conducted properly.
The verification of the registered office must be filed in Form No.INC.22 along with the applicable fee and supporting documentation in accordance with Rule 25 of the Companies (Incorporation) Rules, 2014.
Before, neither the section nor the rules specified a procedure for physically inspecting the registered office of the corporation. Now, the aforementioned Rules have established the procedure for carrying out such physical verification.
Procedure for visiting the registered office to confirm it physically:
The procedure for a company’s registered office being physically verified is outlined in Rule 25B of the Companies Incorporation Rules. It stipulates that the verification must be completed in front of two impartial witnesses, cross-verifies documents submitted under MCA 21, includes an image of the office, and requires the filing of a report. Below is a detailed description of the procedure:[8]
i. Two independent witnesses from the area, as well as aid from the local police: The ROC may visit the registered office for physical verification in the presence of two independent witnesses from the area, as well as request the local police’s assistance if necessary.
ii. Cross-verification of documents submitted under MCA 21: The ROC may bring documents submitted under MCA 21 that support the registered office’s address and cross-verify them with the paperwork gathered during the physical verification. The owner of the property where the registered office is located must properly certify these documents. This is done to make sure the documents are genuine.
iii. Photograph: The registered office must then be captured on camera by the ROC.
iv. The report’s submission: Last but not least, the ROC must create a report with a variety of information, including the company’s name, corporate identification number, most recent registered office address as listed in the MCA 21 record, date of the authorization letter, name of the ROC, date and time of the physical verification, location information with landmarks, information about the person who was present at the time of the visit, remarks, and copies of the pertinent documents. The following documents are pertinent in this situation: (a) a copy of the contract, ownership agreement, rental agreement, or certificate of no objection from the owner, tenant, or lessor for the registered office; (b) a photograph of the registered office; (c) the available person’s self-attested ID card; and (d) any other documents.
The Registrar of Companies (RoC) must notify the company and each of its directors of his desire to have the company’s name removed from the register of companies if it is determined that the registered office is unable to receive and acknowledge all correspondence and notices.
The registrar must also request the company and its directors to send their representations along with copies of any pertinent documents, if any, within 30 days of the date of the notice before taking any action under Section 248 of the Companies Act, 2013[9] regarding the removal of the name of the company from the register.
The revised regulations establish a clear procedure for physically verifying the company’s registered address. Thus, the MCA established a strict and thorough procedure with the establishment of Rule 25B, leaving minimal opportunity for deviation, to maintain transparency in the verification process.
III. Impact of Rule 25B
The Companies (Incorporation) Third Amendment Rules, 2022 is a significant step toward making sure that shell corporations are recognized and that registered offices of businesses are more than just mailboxes. In the event of non-compliance, it also gives the ROC the authority to withdraw the company name.
However, this modification has far-reaching effects on international organizations that have subsidiary corporations in India and use third parties to offer registered office services, in addition to discouraging the creation and existence of shell firms. Foreign businesses will now need to make sure that the registered offices of their subsidiaries pass the test if the ROC undertakes a physical inspection of the premises in addition to having a resident director.
As it might not be commercially viable to start full operations and invest heavily in a registered office, foreign companies that are only testing the waters and do not have an established presence or a broad network in India frequently engage service providers to assist with registered office services. With this change, the ROC might consider such agreements to be in violation of the 2013 Companies Act. In turn, this might force foreign corporations to guarantee that their Indian subsidiaries have their own registered offices from the time of establishment.
Foreign organizations that have previously established businesses in India and use third-party service providers must decide whether to move their registered offices inside their own offices or open a separate office. There is therefore a larger focus on adherence to the word and spirit of the law since they must make sure that a registered office, in line with the Companies Act, is operational and passes the test of physical verification. Foreign entities must move quickly to comply with the Companies Act and Rule 25B of the Companies Incorporation Rules given the MCA’s attitude toward shell companies, which is to crack down severely on them, and the short thirty-day window to defend any ROC notice by making pertinent representations.
IV. Concluding Remarks
The practice of using shell firms for illegal activities is pervasive and on the rise. Around the world, offshore tax havens hold the equivalent of 10% of the global GDP.[10] However, domestic or onshore shell corporations are frequently employed in shady operations. Shell firms are particularly alluring to corrupt actors because they give the owner complete anonymity while still giving them power over the organization.
Rule 25B, which deals with the physical verification of the registered office of the firm, has been added to the Companies (Incorporation) Rules, 2014 regulations. The rule states that the Registrar must visit the address of the company’s registered office and may cause the physical verification of the said registered office in presence of two independent witnesses of the locality in which the said registered office is situated. If necessary, the Registrar may also request assistance from the local Police for such a verification.
The Registrar must physically verify the address of the company’s registered office using the documents filed under MCA 21 in support of that address. To ensure the accuracy of those documents, the Registrar must compare them to copies of supporting documents that were properly authenticated from the owner of the property where the registered office is located. The amendment also specifies how the physical verification report should be written up.
It is interesting to note that many nations, including those in the industrialized and democratic West, are reluctant to eliminate this loophole. Theorizing and research into the phenomenon of shell companies are behind schedule. In the coming years, more interdisciplinary research will be required to comprehend this intricate and significant social issue.
V. Recommendation
The main goal of granting the ROC such rights is to find all shell businesses and remove their names from the ROC’s records. One of the many measures taken by the Ministry of Corporate Affairs to stop money laundering is the removal of shell firms from the system.
If the company complies fully with all requirements connected to maintaining a legitimate registered office, the ROC or a lawfully designated officer of the ROC visiting the registered office shouldn’t be cause for concern.
The following are a few things to bear in mind to ensure that the ROC’s visit, if any, is effective and calm at your registered office:[11]
i. Though it is important to note that “reasonable cause” is not specifically defined by law, the ROC will only visit a company if he has a good reason to think that it is not doing any business or operations. Therefore, whether the ROC believes the company is running a business or not would be up to him. A few situations that can qualify as “reasonable cause” include failing to file yearly reports, failing to deliver correspondence from regulatory agencies, failing to generate money for the company for a continuous two or more years, etc.
Therefore, maintaining the company’s strict compliance is advised.
ii. Make sure there is always someone available at the registered office to receive correspondences, and make sure they are both familiar with the protocol in case someone from the ROC office comes to the registered office’s location.
iii. It is advised to keep all original copies of the supporting documents, such as the rent agreement or lease agreement, utility bills, the owner’s letter of no objection, etc., that were submitted to the ROC with the e-form at the registered office because the ROC will use the originals to verify the documents during the visit.
[1] Companies (Incorporation) Third Amendment Rules, 2022.
[2] CS Manisha Mittal, Physical Verification of Registered Office of Company – Rule 25B, Taxguru (Nov. 3, 2022, 11:27 PM), https://taxguru.in/company-law/physical-verification-registered-office-company-rule-25b.html.
[3] Companies Act, 2013, § 12, No. 18, Acts of Parliament, 2013 (India).
[4] Companies Act, 2013, § 12(9), No. 18, Acts of Parliament, 2013 (India).
[5] Companies (Incorporation) Rules, 2014.
[6] Companies (Incorporation) Amendment Rules, 2019.
[7] Supra note 3.
[8] CS Jaya Sharma, Physical Verification of Registered Office of Company – Incorporation Rule 25B, Taxguru (Nov. 3, 2022, 10:03 PM), https://taxguru.in/company-law/physical-verification-registered-office-company-incorporation-rule-25b.html#:~:text=MCA%20has%20introduced%20an%20amendment,authenticity%20of%20the%20registered%20company.
[9] Companies Act, 2013, § 248, No. 18, Acts of Parliament, 2013 (India).
[10] Jancsics, D. (2018). Shell Companies and Government Corruption. In: Farazmand, A. (eds) Global Encyclopedia of Public Administration, Public Policy, and Governance. Springer, Cham. https://doi.org/10.1007/978-3-319-31816-5_3566-1.
[11] Roedll & Partner, https://www.roedl.com/insights/india-registrar-companies-physical-verification (last visited Nov. 3, 2022).
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