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Business
Shareholders get a mixed bag
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The changes proposed in the Companies (Amendment) Bill 2003 are intended to spruce up the Indian corporate scenario and hence are to be welcomed.
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THE NEED for harmonisation of Indian laws with those of advanced countries, on the one hand, and corporate scandals and scams, on the other, have made further additions and amendments the country's corporate law inevitable. The law thus becomes bulkier with the passage of time. While local business captains and foreign investors seek liberalisation, deregulation and simplification of laws to facilitate more efficient conduct of business, the other affected segments of society clamour for greater protection through tighter law, removal of loopholes and stringent punishment for the wrong doers. The Government has to practise the art of tight rope walking between these two poles.
The Companies (Amendment) Bill 2003 recently introduced in the Rajya Sabha follows the same pattern and proposes many new sops, along with a few slaps too, for company shareholders.
The practice of large parent companies forming chains of subsidiary (shell) companies has been a common feature of the Indian corporate scene all these years. It was found that this process helped camouflage interrelationships and indulge in legal jugglery. Under the amendments, a subsidiary will no longer be allowed to create another subsidiary in future.
Tracing the vanishing tribe
Promoters of new companies will henceforth find it difficult to vanish after cheating the investors. While incorporating new companies, recent photos of the subscribers to the incorporation documents as well as those of the witnesses along with proof of identity will be obtained and kept on record with the Registrar of Companies. Each such photo shall also be signed by the subscriber and the witness.
The stringent provisions relating to issue of prospectus and allotment shall apply to all securities and not merely to shares and debentures. Prospectus will have to be filed also with the Securities and Exchange Board of India (SEBI) for review. Where any prospectus is published in a newspaper advertisement or in any other manner, it should conform to the requirements of the abridged prospectus furnishing all prescribed details. Criminal liability for misstatement in prospectus will entail punishment with imprisonment up to 2 years and with fine up to Rs. 1 lakh (enhanced from Rs.50,000). This offence cannot be compounded by mere payment of fine as is allowed now.
The promoters and intermediaries who fraudulently make false, deceptive or misleading statements, promises or forecasts or dishonestly conceal material facts, and thereby induce persons to invest money in the securities of their company will be compelled to compensate the loss of the investors. This will be in addition to their being punished with imprisonment for not less than six months and fine up to Rs.1 lakh.
Compensation for cheated investors
The proposed Company Law Tribunal will be empowered to impose and recover double the amount as penalty from those who had collected money for securities through such fraudulent methods.. From this penalty amount the Tribunal will refund and make good the loss of such gullible investors. This is a far reaching provision and perhaps the best in this bill.
Application money to be collected on securities is enhanced from 5 per cent of the face value to 25 per cent. This will expedite collection of funds for projects and their timely execution.
Directors and their relatives or associates are prohibited from revoking their applications for issue of securities made in pursuance of a prospectus. In other words, they will not be allowed to escape from their declared commitments
Punishment for impersonation while applying for securities and obtaining allotment or transfer in fictitious names has been enhanced. It will now consist of imprisonment of not less than six months and not exceeding five years and fine up to Rs. 50,000. This penalty and minimum period of imprisonment are new. If allotment of securities is made before listing is finally accepted by the recognised stock exchange and as a result moneys have to be refunded, such refunds should be made with a higher rate of interest than those prescribed earlier in the Act and default will be visited with longer periods of imprisonment. No commission should be paid to intermediaries on securities not offered to the public for subscription.
Direct and indirect buying of its securities by a company will entail severe punishment with fine amounting to three times the aggregate price or face value of the securities whichever is higher and the guilty officers will be imprisoned for not less than three months and up to two years.
Fixing of share premium
Where the company wants to allot further shares to existing members or others, after two years from the date of its formation, to increase its subscribed capital and it desires to offer them at a premium, the amount of such premium shall be approved by the company in the general meeting by a special resolution. In case the resolution for so allotting further shares to existing shareholders or others is passed only as an ordinary resolution, it will be deemed to be valid if the proposed Company Law Tribunal, on an application made by the company, is satisfied that the proposal is beneficial to the company. At present this power is exercised by the Central government.
As regards issue of shares on a preferential basis, the person in whose favour they are to be so allotted shall not be allowed to participate in the voting. In other words, the approval has to be accorded by other members in the form of a special resolution.
Section 81 henceforth will apply also to private companies, and for the valuation of stock options offered to employees.
It is to be noted that while the demand for simplifying provisions for private companies is getting strident, Section 81 is now made applicable to private companies too. Even the provision for commencement of business, earlier applicable only to public companies, is now extended to private companies. As regards share transfers, so far the board of directors was empowered to approve this in all companies but henceforth the approval of the general meeting will be necessary before the board of a private company implements it.
The practice of obtaining date stamp on transfer deeds from a stock exchange or the Registrar of Companies is to be abolished.
The earlier policy of ensuring time bound registration of a transfer deed will cease, allowing undated transfer deeds to float around, until the transferee decides to enter his name and forward it to the company concerned for registration.
Procedural provisions on the issue of share certificates will now apply to all securities, derivatives, options and shares with differential rights and all securities will be deemed to be movable property. Fraudulent issue of duplicate or renewal certificates by companies will attract higher punishment henceforth. Stiff punishments are proposed against the trustees of debenture holders for failure of their contractual duties.
AGMs on Sundays
Annual general meetings will be allowed to be held on Sundays also, enabling larger attendance and participation. Members will have to be content with snacks and beverages, if any, served at these meetings as they (as well as proxy holders) are prohibited by law from demanding gifts. Both giving and demanding gifts have been made punishable offences.
This prohibition will not however extend to discount coupons given to members for promoting sale of the company products.
Heavy penalty will be imposed on companies, which fail to credit the Investors Education and Protection Fund under Sec.205C. These credits are meant to be used for promoting investor awareness and protection of their interests.
Segment reporting will have to be made in directors' reports, in regard to each business segment or division which accounts for 10 per cent or more of the companies' turnover. This information will be useful for analysis of the company's operational strength and weakness.As suggested by the Joint Parliamentary Committee which examined the recent stock scam, the Central Government will prescribe, for share broking companies or any intermediary, limits up to which such companies or intermediary may receive inter corporate loans or deposits and the extent to which any company may make loans or intercorporate deposits or investments. The offences under Sec.372A relating to inter corporate loans and investments are punishable with both imprisonment and fine. They are not compoundable merely by payment of fine.
The Central Government is to be empowered to attach, for a period of one month with the approval of a judicial magistrate, bank accounts of any intermediary or person associated with the securities market if he is involved in the violation of provisions of the Companies Act. Companies have to reconcile their securities balance with the depository within the prescribed time limit.
A number of provisions relating to auditors and directors have been added or amended with a view to ensuring better corporate governance and reliability of the disclosure documents.
It cannot be roses all the way. The bill seems to prove this dictum by proposing certain measures, which will not be palatable to the shareholders. Some of them are indicated here.
Each member can issue only one proxy form and if more than one is issued, all will be invalid. Accepting and demanding gifts is declared a penal offence and penalty up to ten times the value can be imposed. Voting rights of preference shareholders in some cases can be restricted by the Central Government subject to conditions to be prescribed. Shareholders proposing to remove existing auditors or directors or appointing others will have to deposit Rs.10,000 which will be forfeited in the case of lack of minimum votes supporting them. These may be regarded at worst as friendly slaps, but the change regarding dividend is a real punch.
Dividends to become scarcer?
As of now, if a company that has made losses and has also not provided depreciation in the past years wants to distribute dividend from its current year's profit or accumulated past years' profits, it should reckon and provide either for the depreciation of all the previous years for which provision was not made or for the losses of all the previous years, whichever is less, and then only declare a dividend. In other words, provision is to be made either for the loss OR depreciation, whichever is less, before declaring adividend.
It is now proposed in the amendments that it would be necessary to provide depreciation for the last 10 years AND the losses of the previous years before declaring a dividend. This will pull down the net profit available finally for declaring dividend
In the absence of profits for the current year, dividend can be distributed from accumulated profits only with the consent of all directors and prior approval of the financial institutions concerned, if any. Shareholders should have approved this with a special resolution.
The current policy of maintaining dividend over the years will receive a setback from this measure. These changes will have a negative connotation for shareholders whose investments rarely bring dividends. The proposed changes will make the chances even rarer.
One salutary provision now proposed is that interim dividend declared by a board of directors cannot be revoked or modified, after splashing the news in the media and making short term gains in the market. The amount of interim dividend shall be deposited in a separate bank account within 5 days from the date of declaration of the interim dividend. In the final analysis, it has to be conceded that the changes proposed are intended to spruce up the Indian corporate scenario and hence are to be welcomed. But the question is how soon and in what shape the bill will be cleared by Parliament in the midst of the preoccupations and pressures of the forthcoming elections.
P. T. Rangamani
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