ETtech Explainer: How technical glitches on MCA21 turned into business setbacks for Indian companies?

While glitches with the MCA21 portal have arisen and been resolved over the last several years, the latest episode turned out to be critical for a large number of unlisted companies.

On Tuesday, ET reported that the technical issues might not only result in business impediments for companies but also lead to compliance red flags.

What is the MCA21 portal?
A part of the Centre’s e-governance initiative, the MCA21 portal has been designed to automate processes related to enforcement and compliance of the legal requirements under the Companies Act 1956, New Companies Act 2013, and Limited Liability Partnership Act 2008.

It provides digital services such as incorporation of a new company, registration of a new director, and several other company-related compliances.

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Currently, the portals Version 3, or V3 is active. To launch the portal, in 2005, the Indian government had entered into an agreement with Tata Consultancy Services to develop and operate the first version of the portal till 2013.

Following this, Infosys took over the MCA21 project till 2020, and was replaced by L&T Infotech (now known as LTIMindtree) to manage the portal.

What are some of the glitches being faced with the latest portal?
On February 12, the Institute of Company Secretaries of India (ICSI) wrote a letter to MCA secretary Manoj Govil detailing 18 technical issues with the latest version of the MCA21 portal.

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The concerns raised included those pertaining to the PAS-3 form, which companies need to file before they can use funds raised from investors, in addition to DIR-12 form, which is submitted to notify the MCA of appointment of directors and key managerial personnel, the SH-7 form that has to be filed to notify an alteration in the capital structure of the company, and the MGT-14 form for reporting of a corporate resolution.

How are these technical issues impacting companies?
As a result of the glitches, a number of listed and unlisted companies are encountering business impediments.

Compliances related to disclosure of private placements, appointment of directors and creation of charge documents are among the major categories that have not been completed as the portal continues to face glitches, making uploading of forms difficult.

For example, without being able to file the PAS-3 form, companies that have raised funds are unable to use those funds till they make the filing successfully. In addition to business encumbrances, companies are now also staring at the possibility of auditor red-flags and fines.

What is the PAS-3 form and why is it significant?
The PAS-3 form is also known as the ‘Return of allotment’ form. When a company raises capital and allots fresh shares, this form needs to be filed on the MCA21 portal within 30 days and only then can it use the proceeds.

Since companies are unable to submit the form, they are unable to use the proceeds of fundraising. This is leading to a situation where some unlisted companies, especially startups, are potentially staring at a cutting of their bloodline to even manage operational expenses in certain cases.

Is there a way out of these problems?
While founders, company owners and company secretaries are still figuring out a blanket solution to this problem, the Kerala High Court had last week ordered the corporate affairs ministry to begin accepting forms physically.

ET reported last week that the MCA could begin accepting physical forms but the rollout of this alternate mechanism has not been fully concluded.

On Tuesday, Sitharaman conducted a review meeting on the issue and asked the ministry to “monitor the issues faced by market participants regarding the portal on a daily basis”.

She said the ministry is working with all the stakeholders, including the developer of the portal LTIMindtree, consulting firm EY and ICSI to resolve the matter “expeditiously”.