How B2B Companies Can Protect Themselves from Risks Associated with Struck-Off Entities
The business world is getting more complicated. Vendor relationships are crucial for most B2B operations. However, recent industry data reveals a surprising fact: 59% of Indian organizations encountered financial or economic fraud in the last 24 months, with procurement fraud being the biggest risk. Even more concerning, 13% of these organizations did not have a third-party risk management program. This gap exposes organizations to the risk of engaging with partners that may lack proper legal standing.
This vulnerability goes beyond traditional fraud and involves a more complex risk. It pertains to companies that have lost their legal status but still operate. A total of 36,075 bank frauds were reported in FY 2023–24—a 166% increase from the previous year. However, the total value involved declined 46.7%, falling from ₹26,127 crore in FY 2022–23 to ₹13,930 crore in FY 2023–24—equivalent to ₹139.3 billion. For B2B companies, understanding and reducing risks from struck-off entities isn’t just about following rules. It’s about protecting your business from serious financial damage.
The Hidden Threat in Your Vendor Network
Every business relationship comes with risks, but working with companies that are no longer legally active creates a vulnerability that many B2B organizations often miss. In these situations, businesses might unknowingly keep active relationships with defunct companies, exposing themselves to unnecessary legal, financial, and reputational issues.
The problem gets worse since these companies often operate informally, keeping existing contracts and client relationships even after their legal shutdown. This creates a risky grey area where your company might unknowingly take part in transactions that could later be considered invalid or unenforceable. This could lead to significant financial losses and increased scrutiny from regulators.
Mandatory Disclosure Requirements
Since the financial year 2021-22, the Ministry of Corporate Affairs (MCA) has required companies to disclose transactions with struck-off companies in their financial statements. This requirement greatly impacts your annual reporting and compliance responsibilities.
Key Disclosure Elements
Risk Assessment Framework for B2B Companies
Proactive Protection Strategies
1. Automated Verification Systems
Modern businesses require automated solutions for vendor verification. At InstaFinancials, we’ve seen that companies using automated MCA company report verification are able to significantly reduce their exposure to risks associated with inactive or non-compliant entities—compared to those relying on manual processes.
2. Regular Database Updates
Conduct quarterly checks for all active business relationships. The ROC regularly updates its struck off company database, so periodic reviews are necessary to keep information current.
3. Contract Safeguards
Add specific clauses in vendor agreements that require immediate notification of any changes in legal status. This proactive step helps spot potential issues before they affect your operations.
Contract Protection Checklist
Using Technology for Due Diligence
- Company Details India Database Integration
Connect your vendor management system with reliable company details India databases. This connection allows for real-time status checks and automatic alerts for any changes in vendor legal standing.
- MCA Company Reports Automation
Automating the generation of MCA company reports helps keep compliance documents up to date while cutting down on manual verification tasks. These reports offer clear insights into vendor financial health and legal status.
Building a Risk Management Framework
- Due Diligence Process
Establish a clear due diligence process that includes verification of struck-off companies as a required step. This process should cover financial assessment, legal status verification, and ongoing monitoring protocols.
- Vendor Classification System
Implement a risk-based vendor classification system that looks at legal status, financial stability, and transaction volumes. High-risk vendors need closer monitoring and shorter review cycles.
- Documentation Standards
Keep thorough documentation of all verification activities. This documentation is crucial during audits and regulatory reviews. It shows your company’s commitment to compliance.
Securing Your Business Against Struck-Off Entity Risks
Protecting your B2B company from risks related to struck-off entities requires a proactive, technology-driven approach. Automated verification systems, regular monitoring, and thorough documentation create a strong defence against potential financial and legal issues.
At InstaFinancials, we know compliance is not just about following rules; it’s also about securing your business’s future. Our complete approach to vendor verification and MCA compliance helps businesses manage the complex rules of Indian corporate regulations while keeping operations seamless.
Preventing issues is always cheaper than fixing them. By taking these protective steps today, you are ensuring your company’s financial stability and regulatory compliance for the future.
Are you ready to protect your business from struck-off entity risks? Contact InstaFinancials today to learn how our automated compliance solutions can simplify your vendor verification process and ensure you meet regulations. Don’t let struck-off companies put your business at risk—secure your operations with expert advice and the latest technology.
