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Thursday, December 07, 2000
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Online edition of India's National Newspaper Thursday, December 07, 2000 |
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} `DRAFT . } Better deal for shareholders, depositors and creditors
THE LONG wait is over. Both houses of Parliament have found time
to consider and pass the Companies (Amendment) Bill, 2000, that
seeks to strengthen corporate governance alongside the regime of
liberalisation and simplification. The Bill reflects the most
Government's determination and commitment to ensure proper
management of corporate affairs with necessary support systems in
place to enlarge investor protection. The penalties for default
and violation of the provisions of the Act have been enhanced ten
times.
It may be pertinent to note that the first effort to revamp and
rewrite the Companies Act, started in 1991. After a detailed
consultative process, a comprehensive Bill was introduced in the
Rajya Sabha in 1993 but it could not be passed. After the general
elections, the complexion of Parliament had changed as did the
priorities. It was considered that the 1993 Bill did not reflect
the reformist trends reflected by the budget and the policies
announced since 1991. Again a new Bill was drafted in 1997 but
this also did not get through.Thereafter, the Act has been
amended in easy instalments to make it convenient for Parliament
to approve from time to time, retaining the structure of the Act
and not changing the sequence of the sections. By ensuring
continuity, users have been spared of the need to relearn the Act
afresh.
The Companies Act in India is more than 150 years old and
contains, besides the enactment, schedules, rules and
regulations, a whole gamut of case laws from different high
courts and the Supreme Court based on the existing structure and
section numbers of the Act. A total revamp including
rearrangement of sections would have led to avoidable
difficulties in understanding and administering the Act. The Bill
now passed reduces the total number of sections significantly
from 658 by deleting various provisions, which refer to managing
agents, secretaries and treasurers whose role in Indian corporate
management got abolished almost three decades ago. It provides
greater safeguards and new procedures to offer support to
shareholders, depositors and creditors.
In future, a private limited company can be incorporated with a
paid up capital not less than Rs. 1 lakh and a public limited
company with not less than Rs. 5 lakhs. Private limited companies
henceforth will be prohibited from inviting or accepting deposits
from persons other than their own members, directors or
relatives. Existing private and public limited companies have to
enhance their paid up capital to Rs. 1 lakh and Rs. 5 lakhs
respectively within two years from the commencement of this
amendment Act. In case of failure, such companies will be deemed
to be defunct within the meaning of Sec. 560 and their names
struck off from the register of companies by the Registrar.
7 3
In the case of companies already operating with less capital, the
difficulties in striking them off will be watched. These new
limits will not apply to Sec. 25 companies which are associations
not created for profit and do not distribute dividend. At present
private and public limited companies can be incorporated with
just two shares of Rs. 10 each and seven shares of Rs. 10 each
respectively by promoters and they commence operations with
borrowed funds and public money without increasing the promoters'
contribution to capital. The new provision requiring a minimum
paid up capital will lead to increased commitments from the
promoters.
Non-voting shares
Under Sec. 86 a new category of equity share capital is
introduced with differential rights as to dividend, voting or
otherwise in accordance with such rules and subject to such
conditions as may be prescribed by the Government. This will
facilitate the issue of non-voting equity shares that will help
the managements raise additional capital without diluting their
control. It is expected that foreign investors, NRIs and other
shareholders who may not be interested in exercising their voting
rights will subscribe to these shares that would offer higher
dividend and benefit.
The new Sec. 58AA requires every company that accepts deposits
from small depositors to intimate the Company Law Board (CLB) of
any default made by it in repayment of such deposits or part
thereof or payment of any interest thereon, within 60 days from
the date of default furnishing full particulars of the name and
address of each such depositor and the principal sum of deposit
and interest thereon due to them. The CLB on receipt of such
intimation from the company will exercise on its own motion the
powers conferred upon it by Sec. 58A and pass appropriate order
within 30 days from the date of receipt of intimation. The CLB
may also pass the order after the expiry of 30 days on giving the
small depositors an opportunity of being heard. For this purpose
it is not necessary for the small depositor to be present in
person at the CLB hearing.
Protection to small depositors
Under the new amendment, no defaulting company will at any time
accept further deposits from small depositors unless each of the
small depositors had been paid the amounts due. Where companies
that have defaulted in repayment of principal and payment of
interest to small depositors, had obtained funds by taking a loan
for the purpose of its working capital from any bank, they will
first utilise the funds so obtained for the repayment of any
deposit and interest to small depositors before applying such
funds for any other purpose. Failure to comply with Sec. 58AA and
any order passed by the CLB will be punishable with imprisonment
up to three years and also fine not less than Rs. 500 a day
during the period of non-compliance. 7 3
A small depositor for this purpose means a depositor who has
deposited in a financial year a sum not exceeding Rs. 20,000.
Sec. 58AAA states that every offence in relation to acceptance of
deposits under Sec. 58A and Sec. 58AA will be cognizable offence
under the Code of Criminal Procedure, 1973 and courts will
entertain complaints made by the Central Government (Department
of Company Affairs) in this behalf.
For better protection of holders of secured debentures, Sec.
117A, 117B and 117C have been added to provide for execution of
debenture trust deed within a timeframe, appointing debenture
trustees with their duties specified and making the company
liable to create security and debenture redemption reserve.
Voting by postal ballot
A new Sec. 192A facilitates passing resolutions by postal ballot
(including voting by electronic mode) in the case of listed
public companies. Though this will involve additional work and
expenditure to the companies, the shareholders who are not able
to attend company meetings either in person or by proxy and vote
thereat, will now be able to exercise their voting with this new
facility. The notice of the resolution will be sent by registered
post acknowledgement due or by any other method as may be
prescribed by the Central Government and will include with the
notice, a postage prepaid envelope to facilitate the
communication of the assent/dissent by the shareholder to the
resolution within the prescribed date.
Default in this regard will entail the company and every officer
of the company being punished with fine that may extend to Rs.
50,000 in respect of each such default. Sec. 252 has been amended
to provide that a public company having a paid up capital of Rs.
5 crores or more and 1,000 or more small shareholders may have a
director elected by such shareholders (holding shares of nominal
value of Rs. 20,000 or less) to represent their cause. How far
the companies will implement this provision is to be seen.
Prompt payment of dividend
Regarding payment of dividend, Sec. 205 has been amended to
include interim dividend also under the term dividend and provide
for the amount of dividend being deposited in a separate bank
account within five days from the date of declaration. Under Sec.
205A, the earlier time limit of 42 days is now reduced to 30 days
for despatching dividend warrants to the shareholders. Sec. 207
now provides that if dividend has been declared but not paid or
the dividend warrant has not been posted within 30 days from the
date of declaration to any shareholder entitled to the payment
thereof, every director who knowingly defaults in this regard
will be punishable with simple imprisonment for a term extending
to three years and will also be liable to a fine of Rs. 1,000 for
every day of continuing default and the company will be liable to 7 3
pay a simple interest at 18 per cent per annum during the period
of default. This will be subject to the exceptions in the proviso
under this section.
New provisions on directors
Sec. 217 has been enlarged to provide for inclusion of directors'
responsibility statement in the annual report of the board of
directors as regards observance of accounting standards and
material departures, safeguarding the assets of the company and
preventing and detecting fraud and other irregularities.
The maximum number of directorships in public limited companies
that a person can hold has been reduced from 20 to 15 in order to
enable more time being made available by the directors to the
companies.Sec. 292A has been inserted to provide for the
constitution of audit committees of the board in public companies
with a paid up capital of Rs. 5 crores and above. The majority of
such committee will consist of part time directors.
The committee will examine the audit and internal control systems
and review half yearly and annual financial statements before
submission to the board and also investigate any other matter in
relation to the above and the committee's recommendations if not
accepted by the board, will be communicated to the shareholders
with reasons for non-acceptance. Any default in compliance will
lead to the company and every defaulting officer being punished
with imprisonment up to one year and fine up to Rs. 50,000 or
both.
The company secretaries have been given a new role in corporate
governance. Sec. 383A has been amended to provide that every
company not required to employ whole time company secretary and
having paid up share capital of Rs. 10 lakhs and above shall file
with the registrar of companies a certificate from a secretary in
whole time practice in such form and within such time as the
Government may prescribe, as to whether the company has complied
with all provisions of the Act and a copy of such certificate
shall be attached to the board's report. This will help the
companies to ensure better compliance of the Act.
P.T.RANGAMANI
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