Drastic dip in registration of new firms as financers feel Covid-19 pinch

The first clear sign of Covid’s impact on the economy is the drastic decline in registration of new companies from February 2020. Ministry of Corporate Affairs (MCA) data shows that most entrepreneurs have blocked their risk capital and are hesitant to invest in new ventures.

In April 2020, a total of 3,209 new companies were registered with MCA. This is a 70 per cent drop as compared to 10,383 registrations in April 2019.

MCA data shows that a sharp decline in registration of new companies started from February this year, and accelerated in the next two months with the spread of Covid-19. In March, when the first lockdown was announced, registration of new companies had dropped to 5,788. Just the next month, the number dropped to 3,209 – a dip of 45 per cent.

Similarly, Limited Liability Partnerships (LLPs), an alternative corporate structure known for relatively less regulatory compliance, has also shown a downtrend. In April 2019, a total of 4,186 LLPs were registered with MCA. Corona-related uncertainties, however, plunged this number to 574 in April 2020 – an 86 per cent drop from the same time last year.

Though the MCA has claimed that it has eased rules, but apparently, entrepreneurs are far from being convinced.

“The Ministry of Corporate Affairs has taken several steps to ease the hardships faced by corporates in their operations. Notwithstanding the lockdown, the Central Registry Centre at Manesar has been operational for fresh incorporation, name reservation, etc,” MCA secretary Injeti Srinivas said in their monthly bulletin.

Companies and their financers are facing huge revenue loss due to the pandemic that has adversely affected almost every business. Suppliers, manufacturers and financiers alike are struggling to arrange short-term solutions to support cash flow. Experts said fears around the economy are surmounting and no one wants to invest in a new venture.

“There is a general feeling of cash conservation. Most people don’t want to invest their money into a new venture at this time. This uncertainty is likely to continue at least till the beginning of the next calendar year and clarity would emerge only after that,” Amarjit Chopra, former president of the Institute of Chartered Accountants of India, told India Today.

Nearly 20 lakh companies are registered with MCA under the Companies Act, 2013, as of April 2020. Of these, about 12 lakh companies are active, while the rest are either shut or liquidated.

Most economic centres, housing majority of the new entities, have been badly hit by Covid-19. Delhi and Mumbai, India’s biggest coronavirus hotspots, house nearly 20 per cent of the new companies and LLPs set up in the last one year.

One major reason that registration of new companies have come to a halt is the uncertainty in Foreign Direct Investment (FDI). The United Nations Conference on Trade and Development recently said in the World Investment Report 2020 that FDI will drop up to 40 per cent this year from the 2019 value of $1.54 trillion.

Corona-related measures, particularly prolonged lockdown, have forced many companies to revise their existing and future investment plans, including incorporation of new companies.

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