Companies Amendment Act 2000 v 1999 Bill

THE COMPANIES (Second Amendment) Bill, 1999 (the 1999 Bill), introduced in the Lok Sabha in November 1999, recently entered the statute books, under the name of the Companies Amendment Act 2000 (the 2000 Act).

In a series of four articles in July-August 2000 in this paper, this writer had critically examined the bill's provisions, highlighting both its beneficial and inimical features. This article seeks to examine the changes in the 2000 Act vis-a-vis the 1999 Bill, the improvements and the defects.

Careless drafting

The 2000 Act starts on an inauspicious note, thanks to careless drafting. It provides that Sec. 7 & 75 will not come into force immediately. Sec. 75 should actually be Sec. 80 relating to postal ballot.

The drafters apparently overlooked that with increase in the total number of sections in the 2000 Act, as compared to the 1999 Bill, the individual numbers of various sections have also changed.

As it is Sec. 75 is only a provision seeking to enhance penalties. It will be interesting to watch how the Government wriggles out of this situation.

The drafting of Sec. 92, on payment of dividends, needs amendment. As the Act stands now, companies are precluded from paying out dividends other than interim dividends.

The faux pas occurs in sub-section (1B) of this section - ``the amount of dividend, including interim dividend, so deposited, shall be used for payment of interim dividend". In place of the last two words interim dividend', the correct wording should have been `such dividend'.

There is also some confusion regarding provisions of Section ``a dealing with initial public offer (IPO). It is stipulated that any IPO of a public limited company for a sum of Rs. 10 crores or more should be in demat form.

Since the usual practice is for companies to get listed only after they make an IPO or make such offer with the undertaking to get it listed, a better wording could have been, ``every public limited company making a public offer, after the commencement of the Companies Amendment Act, 2000".

Confusion in 1999 bill cleared

The 2000 Act makes it clear that the approval of the Regional Director for shifting the registered office of a company from one location to another within the same State is not necessary unless such change entails that the company would come under the jurisdiction of a new Registrar.

As of now, this situation will rise only in Tamil Nadu and Maharashtra.

Secretarial compliance certificate

The 1999 Bill and the 2000 Act require every company with paid-up capital in the range of Rs. 10 lakhs to Rs. 50 lakhs, to submit to the Registrar, annual secretarial compliance certificates from a company secretary in practice as to whether the company had complied with all provisions of the principal Act. The 2000 Act widens the scope by mandating that copies of such certificate should form part of the board's annual report to members.

Small investors side-tracked

The avowed intention of the 2000 Act is, inter alia, the protection of investors. This is belied as far as small investors are concerned. The 1999 Bill had a path-breaking provision that 'a public company having a paid-up capital of Rs. 5 crores or more and having 1,000 or more small shareholders, shall have at least one director elected by such shareholders'.

Alas! the 2000 Act unabashedly alters the key words `shall have', to `may have'. In effect, it means that the original intention has been completely negated: election of a director from among small shareholders will now depend on the whims and fancies of the majority shareholders. It is sad that the Government succumbed to pressures from leading industrial and commercial federations. The provision to issue equity shares with differential rights as to dividends, voting rights etc. seems to be another ploy to take away the existing rights of small shareholders.

This type of equity shares will be, for all practical purposes, no different from preference shares, except in name! Another sad instance of pampering big business!

Private placement of shares

The Government has done well in including in the 2000 Act a provision that a private placement will now be considered public offer with all its hassles, if it involves an offer or invitation to subscribe for shares or debentures to 50 persons or more.

This restriction will eliminate the current unhealthy practice of companies sending out offer of shares or debentures to a select mailing list, marking it private and confidential, under the cloak of private placement. However, this stipulation will not apply to NBFCs or public financial institutions.

Interestingly the Annual Report of the Reserve Bank of India for 1999-2000 highlighted that private placement continued to be the main source of capital for companies. A total of Rs. 61,259 crores was raised through 578 private placements as against Rs. 59,044 crores through 367 private placements in the previous period.

Lost opportunity

The Company Law Settlement Scheme, 2000 floundered mainly because it overlooked the fact that filing of copies of accounts and annual returns is intrinsically connected to holding annual general meetings (AGMs). Mr. C. R. L. Narasimhan had pointed out in this paper this in-built lacuna when CLSS was introduced. The Government could offer amnesty for non-filing of the above documents by amending the Rules but amnesty for non-holding of AGMs requires amendment of the Act. The Government has lost a golden opportunity as it could have, with advantage, amended the provision relating to AGMs through the 2000 Act.

Even though the 2000 Act has come into force, many of the provisions can be implemented only after the relevant Rules are published. As such a final assessment will have to wait.

It may not be out of place to mention that some of the requirements of the listing agreement are in conflict with the corresponding provisions in the Act. As an Act of Parliament is supreme, SEBI should takes steps to modify such provisions in the listing agreement.

S. Balakrishnan

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