Blogs: Why Penalize a Company That Never Even Started? Reconsidering Late Fees for Pre-Commencement Non-Compliance

Overview

Late fees imposed on companies that never even commenced business. Let’s understand this better. A company is incorporated, say in September 2021. Due to funding delays or strategic pivots, it never files INC-20A (Declaration of Commencement of Business). Effectively, it never started operations, never opened a bank account, and never did any business. Then in August 2024, it finally files INC-20A to begin operations.

Why Penalize a Company That Never Even Started? Reconsidering Late Fees for Pre-Commencement Non-Compliance

What happens next?

• MCA asks the company to file AOC-4 and MGT-7/MGT-7A for FY 2021-22, 2022-23—even though the company didn’t function.
• The system generates late fees for all previous years, sometimes amounting to lakhs, even for an OPC or small company.
• The company is treated as a regular non-compliant entity—even though it was effectively dormant and non-operational.

This Approach Needs Reconsideration

The intent of INC-20A is to act as a formal declaration that the company is ready to start business. Under Section 10A of the Companies Act, 2013, a company cannot commence operations without filing INC-20A.
So, if a company doesn’t file INC-20A, it technically:
• Cannot borrow money
• Cannot start business activity
• Cannot make transactions
If the law itself doesn’t allow operations to begin before INC-20A, why penalize companies as if they were running entities all these years?

The Compliance Trap

For small and OPC companies that were dormant since incorporation:
• They face an unfair burden to backfile multiple years of forms
• They incur steep late filing penalties
• They may even be compelled to file NIL AOC-4 and MGT-7/A just for technical closure
• Directors are forced to file DIR-3 KYC every year, and pay ₹5,000 late fee—even though the DIN was never used actively
This is not just a compliance issue—it’s a barrier to revival.

What Needs to Change

A simple and fair policy shift would be:
1. Late fees for annual compliance should apply only after the filing of INC-20A.
2. If a company files INC-20A late, it should pay that penalty—but should not be forced to file AOC-4 or MGT-7/7A for previous years.
3. OPC and small companies should be exempted from retrospective filings where no business has been conducted.
4. DIR-3 KYC late fee should not apply to inactive DINs for periods prior to INC-20A—when the director legally had no role or decision-making capacity.
These changes are not radical. They’re rooted in common sense and the original spirit of the law.

Why It Matters

As a reg-tech founder working closely with early-stage startups, I’ve seen this scenario repeatedly: Founders get stuck between not having started anything and still being penalized as if they were running a company actively.
We talk about Ease of Doing Business. But this is where friction quietly kills entrepreneurship before it begins.
Even well-intentioned entrepreneurs who want to make things right find themselves penalized more for their honesty than the initial delay.

Conclusion

Let’s treat commencement as the true starting point for compliance—not just incorporation. If a company hasn't filed INC-20A, it hasn't started. Let the system recognize that—and support genuine entrepreneurs trying to formalize when they’re ready. Ease of Doing Business also means not punishing people for not starting.

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