The incorporation of companies has steadily declined since May this year, pointing to a slowdown in entrepreneurship at a time various agencies have lowered their economic growth forecasts.
Official data from the corporate affairs ministry showed that over 15,900 companies were incorporated in April, which rose to 16,500 in May and then gradually declined every month to 10,725 in October.
Experts said that this may not be because of any regulatory changes but may be reflective of the general sentiments in the economy. The number of foreign entities such as branches or liaison offices set up in India every month has remained a handful this year.
The total authorized capital—the maximum amount of the capital for which shares can be issued by the company to shareholders—of all companies incorporated in a month has also declined from about ?2,230 crore in May to ?1,263 crore in October. The incorporation of companies indicates investment intent or reorganization of companies, but the actual commencement of business operations may depend on economic and other factors.
The decline in the setting up of companies comes at a time global economic growth prospects for the current and next fiscal are being lowered by various agencies, including multilateral agencies like the International Monetary Fund.
“The decline in monthly incorporations over the past few months could be due to the market trends about fresh investments, including FDI into India. There has not been any major regulatory change specific to India that may be attributed to this trend," said Noorul Hassan, Partner with Lakshmikumaran & Sridharan Attorneys.
IMF said in its October global economic outlook that while its global growth forecast for 2022 remains unchanged at 3.2%, it would slow to 2.7% in 2023—0.2 percentage points lower than its July forecast—with a 25% probability that it could fall below 2%.
In September, RBI cut India’s growth forecast to 7% from its earlier 7.2% forecast citing headwinds from extended geopolitical tensions, tightening global financial conditions and a possible decline in the external component of aggregate demand as downside risks to growth.
According to Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm, the declining trend in company registrations could be reflective of the broader overall trend of a global slowdown combined with massive layoffs in the tech space.
“Funding winter for startups combined with large-scale layoffs has significantly reduced the risk appetite of first-time founders, resulting in fewer new entrepreneurial ventures. The chances of securing funding and sustaining new business in the face of the upcoming global recession are very slim. The world’s largest investment banks and multilateral institutions like World Bank, IMF, etc., too, have estimated decelerating global economic growth in 2023," said Maheshwari.
According to the IMF, more than a third of the global economy will contract this year or the next, while the three largest economies—the United States, the European Union, and China—will continue to stall.
“In short, the worst is yet to come, and for many people, 2023 will feel like a recession," IMF said in its World Economic Outlook.
It is possible that holidays in a festive season may also have played a role in the decline in company registrations in October.
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