1. If a company has share capital and has issued a prospectus, then: -
a) Shares up to the amount of minimum subscription must be allotted.
b) Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares.
c) No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognized stock exchange.
d) A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed.
2. If a company has share capital but has not issued a prospectus, then: -
a) It must file a statement in lieu of prospectus with the Registrar of Companies
b) Every director has paid to the company on each of the shares, which he has taken the same amount as the other members have paid on such shares
c) A statutory declaration in Form 20 signed by one director or the employee - company secretary or a
Company secretary in whole time practice that the above provisions have been complied with must be filed.
Once the above provisions have been complied with, the Registrar of Companies grants "Certificate of Commencement of Business" after which the company can commence its activities.
Proposed amendments to Indian Companies act 1956
1.Private and public Company
The proposal is that a private company shall have minimum paid-up share capital of Rs. 1 lakh or such higher amount as may be prescribed. Such company is also proposed to be prohibited to make any invitation or acceptance of deposit from persons other than its members, directors or their relatives. A public company should have a minimum paid up share capital of Rs. 5 lakh or such higher amount as may be prescribed. The Bill also proposes that a private company with less than Rs. 1 lakh paid-up capital and a public company with less than Rs. 5 lakh paid up capital will have to increase their respective capitals to Rs.1 lakh and Rs.5 lakh within a period of two years from the commencement of this Amendment Act. In case the above companies do not increase their paid up capital, they would be deemed to be defunct company under section 560 of the Act and their names shall be struck off by the Registrar of Companies.{Section 3}
2.Deemed public company
The Bill lays down that provisions of the Companies Act for deemed public company, i.e. private companies which are treated as public companies under the Act, will not apply from the effective date of the new law. It is significant that the position of the existing deemed public company will not undergo any change. {Section 43 A}
3.Registered office
Another proposal is that shifting of registered office of a company from one place to another within a state would require a confirmation by the regional director. Significantly, the notes to the Clause given in the Bill states that the confirmation of regional director would be required only where the registered office is shifted from the jurisdiction of one Registrar of Companies to another within the same state. It appears that the words of the Clause do not conform to its notes and therefore appropriate amendment is required. {New section 17A}
4.Interim Dividend
The Bill proposes to define dividend to include interim dividend as these two are not considered same. Pertinently, the existing Companies Act does not contain any provision relating to interim dividend. The model Article under Table A only empowers the Board of directors to pay interim dividend as justified by the profits of the company. Thus under the existing provisions, restrictions applicable to declaration and payment of dividend does not apply to interim dividend. With this new law coming in force, the restrictions of dividend will apply to interim dividend. {New section 2 {14A}}
5. Dividend
The time limit for payment of dividend is sought to be reduced from 42 days to 30 days which seems to have limited benefit. It may be mentioned that the amendment made in 1960 had reduced the period from three months to 42 days , which was significantly beneficial. {Sections 205A & 207}
6. Powers to SEBI
Certain powers relating to administration of provisions like acceptance of deposits, issue and transfer of securities are sought to be conferred on Securities and Exchange Board of India {SEBI} in case of listed public companies and those public companies which purport to be listed {New section 55A}. In respect of section 209A, the Bill gives powers to officers of SEBI for inspection of books of accounts etc. of companies. The question arises as to why SEBI should be empowered in areas which do not have link with stock market related matters and investor protection.
7. Fixed deposits
This provision is proposed for the benefit of small depositors. It is provided that where a company makes any default in repayment of deposits or any interest thereon to the small depositor, an intimation has to be given to Company Law Board {CLB} within 60 days from the date of default, and CLB has to pass an appropriate order within 30 days of receipt of intimation. Small depositor means who has invested up to Rs. 20,000/- in a financial year. The section also mentions that a company shall not accept further deposits from small depositors unless each of those whose deposit has matured has been paid the amount of deposit and interest accrued. Exemption has been granted in case of deposits which have been renewed or whose repayments have become impracticable due to the death of the depositor or have been stayed by competent court/authority.{New section 58AA}
8. Offering shares or debentures to the public etc.
Companies issue shares and debentures on private placement or preferential basis to large number of select persons with the condition that such issue is not calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by any person other than those receiving the offer or invitation, or, such issue is a domestic concern of the person making and receiving the offer or invitation. Thus pursuant to section 67 {3} {a} and {b} of the Companies Act there is no issue to the public and strictness of public issue are avoided. The proposed amendment states that where an offer or invitation to subscribe for shares or debentures is made to 50 or more persons, such offer or invitation would tantamount to being made to public and thereby all the restrictions of public issue will apply. {Section 67}
9. Shares held in Trust
The Sections 153A, 153B , 187B relating to appointment of public trustee, declaration of shares and debentures held in trust and exercise of voting rights in respect of shares so held are sought to be made inapplicable. The section 187C which provides for declaration by persons not holding beneficial interest in any shares is also proposed not to apply to shares held in trust.
10. Postal Ballot
The concept of passing general meeting resolution by postal ballot is new. The clause states that where the Central Govt. has notified that certain businesses have to be conducted only by postal ballot, such businesses cannot be transacted in a general meeting. Thus a company will be obliged to resort to only postal ballot. {New Section 192A}
11. Auditors - Private companies
Existing restrictions on auditors of a company are that he should not be in whole time employment elsewhere and can hold only specified number of appointments as auditor. It is proposed that these restrictions will not apply in case of a private company. Thus private companies shall be excluded in reckoning the number of companies which an auditor can audit. {Section 224}
12. Auditors- Dis-qualifications
It is proposed that where an auditor holds any securities of the company after one year from the commencement of the new law, he is disqualified to be appointed as an auditor. Significantly the restriction is in relation to appointment and it may not apply if securities are held by him during the course of his appointment and divested before next appointment. Moreover, it appears unreasonable that holding of even one security would attract disqualification. Holding of minority stake in a company cannot make an auditor prejudiced while conducting his audit of the company. Therefore, there should be significant holding by the auditor to attract this restriction. {Section 226}
13. Auditors - Observations
In respect of powers and duties of auditors it is proposed that the auditors' report has also to give, in thick type or in italics, observations or comments which have any adverse effect on the functioning of the company. Also, the report has to include whether any director is disqualified from being appointed as director under the proposed amended section 274 of the Act. The meaning of the words "adverse effect" is not clear and neither one can interpret what areas of functioning will be covered by the auditors. In absence of this, the matter could become subjective which is undesirable. {Section 227}
14. Audit committee
The new section proposed is in relation to constituting audit committee of the Board and it is a major step towards good corporate governance. The scope of the committee, inter alia, is to review of the half yearly and annual financial statements. It is well known that financial statements are prepared quarterly as per listing agreement. There is, therefore, no justification for providing for the review of half yearly financial statement, more particularly for listed companies. Another provision that the recommendation of the committee would be binding on the Board seems to be not proper. The Board being a superior body should always have the discretion to accept or reject the recommendation of the audit committee which should be a subordinate body. Further, provision that the chairman of the committee has to attend Annual General Meeting also seems to be impracticable. The chairman or in his absence any member of the committee should be permitted to be present at the AGM for giving clarification on matters relating to audit. It may also be considered to make mandatory the attendance of the auditor or his representative at the AGM. {New Section 292 A}
15. Directors' Report
The law is sought to be changed to provide giving of additional information in the Board's report. This is in respect of Directors fulfilling their responsibilities in relation to the accounts of a company. {Section 217 [2AA]}
16. Small shareholders' director
It is provided that a public company having a paid up capital of Rs. 5 crore or more and 1000 or more small shareholders shall have at least one director elected by such small shareholders in the prescribed manner. The words "small shareholders" have been defined to mean shareholders holding shares of nominal value of Rs. 20,000 or less. It is not clear as to why the word "members" has not been used in place of "shareholders" as has been done in other sections like 172,174,175,176 etc. It is well known that a shareholder need not be member unless his name is entered in the Register of Members u/s 41 of the Act. So what happens if a shareholder who has not got his shares registered in his name wants to exercise his rights. Will the company allow him this? Surely, law should be unambiguous. {Section 252}
17. Directors
This section in respect of dis-qualifications of directors is sought to be made wider by adding two more dis-qualifications for public companies. The first one is in relation to a company not filing annual accounts and annual returns for continuous 3 financial years w.e.f. 1-4-1999 and the second relates to failure to repay the deposits or interest on due date, or redeem debentures on due date or pay dividend and such failure continuing for one year or more. The non eligibility for appointment as director is for five years from the date of failure. It is to be made transparent at what point of time the failure to pay dividend commences. Is it on expiry of 30 days from the date of declaration of dividend as provided sections 205 A and 207, or absolute non payment of dividend? {Section 274}
18. Number of directorships
The proposal is to reduce the number of directorships held by a person from 20 to 15. If the reason for the proposal is to allow the directors more time and energy to attend to their responsibilities in lesser number of companies, it is doubtful whether this will have any significant impact in actual practice. {Sections 275 to 277 & 279}
19. Depreciation
The words "the amount calculated with reference to the WDV of the assets" in the section are proposed to be substituted by the words "amount of depreciation assets". The intention of the new law is that for the purpose of calculation of managerial remuneration the amount of depreciation will be the same as provided in the profit and loss account of the Company. {Section 350}
20. Secretarial audit
The Bill proposes that every company not required to appoint wholetime company secretary and having paid up share capital of Rs. 10 lakh or more, shall file with the Registrar of Companies a certificate from a practicing company secretary as to whether provisions of the Act have been complied or not. Keeping in view that there would be numerous companies whose paid up share capital is less than Rs. 10 lakh it is not evident as to how such companies are taken out of the ambit. Does this mean that it is not required to monitor such companies diligently? This does not seem to have rationality. Hence the ceiling of Rs. 10 lakh should be lowered to Rs. 1 lakh. {Section 383A}
