Big unlisted firms: MCA may ask for more frequent filing of financial statements

Armed with a recent amendment to the Companies Act, the ministry of corporate affairs (MCA) may direct large unlisted entities – the likes of Flipkart, Zomato and Patanjali – to file financial statements more frequently with the Registrar of Companies (RoC) than the annual periodicity now.

The rationale behind the move is to enable early fraud detection and statutory compliance.

At present, listed companies have to submit financial statements annually to RoC and upload their financial results on a quarterly basis on the stock exchanges, under Sebi norms. However, private unlisted companies furnish financial data to the RoC only via their annual statements.

The Companies (Amendment) Act, 2020, provided for preparation of financial results of prescribed classes of unlisted companies on a periodical basis. These will be required to be audited or at least reviewed by an external professional.

Sources in the government said MCA will call a meeting of the stakeholders later this month to deliberate on the reporting periodicity and the classes of companies that would be asked to file financial statements more regularly.

The criteria could include turnover or paid-up share capital or a combination of both. “The ministry intends to utilise this for better compliance and to bring in more transparency in functioning of unlisted companies, especially large unlisted firms,” one of the sources said.

In 2011-12, the MCA introduced eXtensible Business Reporting Language (XBRL) reporting. One of the features of XBRL was early fraud detection it allowed. Besides listed companies, firms having paid up capital of `5 crore or above and those with turnover of Rs 100 crore or above have to file information in XBRL. NBFCs, HFCs and companies engaged in banking and insurance sector are exempted from filing of financial statements under XBRL.

“XBRL has not been as effective in early fraud detection as was expected. Intention was that as income tax and sales tax officials scrutinise tax fillings/data, the MCA will have a similar facility to track companies,” a source said.

Welcoming the MCA’s move, Nangia Andersen India’s partner (regulatory) Nischal Arora said while frequency of filing and applicability on a specific class of companies will be known only once the Centre issues corresponding rules, this requirement can be viewed as a government response to the recent setbacks suffered by the financial sector from NBFCs.

“The move does allow the companies regulator to keep a timely check on movement of financial assertions of large unlisted companies. The amendment will further strengthenearly fraud detection capabilities of the companies regulator,” he added.

Arora said the government needs to first devise a balanced formula to identify systemically important unlisted companies based on their paid-up capital/turnover/profits. Thereafter, it will have to seek the right mix of financial data that would enable it to ascertain whether a company requires further inspection of books by RoC or can be referred to the SFIO for further investigation.

AMRG & Associates CEO Gaurav Mohan said, “The government’s intention seems to bring big unlisted companies on a par with provisions of listed companies. There are a number of unlisted firms having mammoth turnovers and net worth, the likes of which are Parle Products, Zomato, Flipkart, Patanjali Ayurved and many more. Amendment will introduce more compliance on part of notified unlisted companies which are a major contributor to the Indian economy.”