MCA's early-warning system stalled

The Ministry of Corporate Affairs (MCA) has decided to put the early-warning system on the backburner due to technical snags.

Sources close to the development said the software-based system incorporated ten financial parameters for diagnosing problems in a company which was not giving the desired results.

The focus of the software is detecting the diversion of public money by companies within their own concerns or elsewhere. The 10 financial parameters comprise financial ratios from the company balancesheet, but are worked out exclusively by MCA officials to detect violations of the Companies Act.

The programme will be implemented once it gets corrected, officials said.

Besides, the ministry has decided to keep listed public sector undertakings (PSUs) out of the purview of the early-warning system. Sources said the work of monitoring listed PSUs should not be duplicated, since the Comptroller and Auditor General (CAG) of India is already engaged in this work.

Moreover, the concern of diversion of public funds, both debt and equity, is acute for the private companies. This is because, most of times, money raised from the public is used for personal gains of the company management or directors or some objectionable end-use that could be detrimental for shareholders, officials said. This, they said, becomes the root cause of financial scams.

Meanwhile, MCA proposes to celebrate third week of December as "Corporate Week". During this week, it will award various companies for their achievements in their respective sectors. At present, the ministry is conducting the exercise to select this year's awardees.

The proposed early-warning system had started as a software-based programme meant to send in alerts for a company if the quantum of related party transaction was more than 5 per sent of the domestic sales or 50 per cent or more directors resigned within a year or earning per share fluctuated more than 25 per cent compared to previous year. It aimed to bring in not only listed but also unlisted and smaller firms under its ambit.

Earlier, the ministry, in its meetings with registrar of companies, had decided to conduct quarterly scrutiny of end-use of funds raised by companies through initial public offer (IPO).

The scrutiny will monitor the utilisation of the money raised by companies from the public and assess if the utility matches with the IPO prospectus filed by it. This forms part of the effective technical scrutiny mechanism worked out by the ministry to detect non-compliance and non-disclosure by companies.

The logic behind this exercise is that often, when a company defaults, ordinary shareholders are the worst suffers. This is because debt instrument holders, who have lent money to the company, have the first right over their assets, followed by claim of the preferential shareholders and then ordinary shareholders.