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The Companies Act, 1956 is the principal landmark legislation that governs companies in India. The Act prescribes provisions for protection of the interests of the investors, creditors and public at large but at the same time permits the management to utilize its resources for optimum results and prosperity.
Over the years, the functioning and operation of the Act brought to light several lacunae and defects in its provisions. In order to remove these defects, the Act was amended from time to time, comprehensively. But, despite these extensive amendments and alterations, the Act continues to comprise of certain deficiencies.
In light of this, the Ministry of Company Affairs carried out a comprehensive review of the provisions of the Companies Act, 1956 on the basis of a detailed consultative process. Further a `Concept Paper on new Company Law’ was placed on the website of the Ministry on 4th August, 2004. The inputs received were put to a detailed examination in the Ministry.
The Government constituted an Expert Committee on Company Law under the Chairmanship of Dr. J.J. Irani on 2nd December 2004 to advice on new Companies Bill. The Committee submitted its report to the Government on 31st May 2005. In addition to this, detailed consultations were carried out with various Ministries, Departments and Government Regulators. The Companies Bill was accordingly drafted in consultation with the Legislative Department of the Central Government.
In furtherance of the same, the Companies Bill, 2008 was introduced in the Lok Sabha on 23rd October, 2008. But due to dissolution of the Fourteenth Lok Sabha, the Bill lapsed. Recently on August 2009, the Government decided to re-introduce the Companies Bill, 2008 as the Companies Bill, 2009, without any change except for the Bill year and the Republic year.
The Companies Bill, 2009 is divided in 28 Chapters consisting of 426 Sections, as opposed to the 658 Sections of the existing Companies Act, 1956. The Bill, inter alia, reinforces shareholders democracy, facilitates e-Governance in company processes, recognizes the liability of Boards, directors and senior management personnel of companies, provides for a new scheme for penalties and punishment for non compliance or violation of the law, harmonizes corporate regulation with action by sectoral regulators, incorporates a new framework for mergers and amalgamations of companies and provides an extensive Insolvency Code based on the latest principles recommended by the United Nations Commission on International Trade Law (UNCITRAL). Some of the important provisions of the Bill, in comparison with the Companies Act, 1956, are as follows:
Incorporation of Companies:The procedure for incorporation of companies has been stream-lined and made easier. This is primarily in light of e-Governance facilities. The principal changes are as follows:
1. The provisions under the current Companies Act, which prescribed minimum paid-up share capital for private and public companies have been scraped.
2. Chapter I of the Act provides for incorporation of a one-person company and a small company.
A one-person company is a company which has only one person as its member. It can have a minimum of one director. The Memorandum of a One Person Company shall indicate the name of the person, or any changes thereto, who shall become the member of the company in the event of the subscriber’s death, disability or otherwise. If the liability is limited, the company should add the words “OPC Limited” at the end of its name. Further, a One Person Company is exempt from holding its Annual General Meeting.
A small company means a company, other than a public company:
(i) whose paid-up share capital does not exceed such amount as may be prescribed and the prescribed amount shall not be more than five crore rupees; or
(ii) whose turnover as per its last profit and loss account does not exceed such amount as may be prescribed and the prescribed amount shall not be more than twenty crore rupees.
But this does not include a holding or a subsidiary company, a company formed for charitable objects and a company formed under a Special Act.
3. Under the current Companies Act, a company formed for charitable purposes is prescribed under Section 25. But under the Companies Bill, 2009 the same provisions have been incorporated under Section 4.
4. The provisions relating to Certificate of Commencement of Business have been dispensed with. But a public company has to file with the Registrar a declaration as to payment of shares by the subscribers to the Memorandum and a verification of the registered office of the company.
5. It is proposed to relax the restrictions limiting the number of partners in entities such as partnership firms, banking companies to a maximum 100, with no such ceiling as to professional associations regulated by Special Acts.
Securities and Share Capital:1. Under the Companies Bill, 2009 a company may issue Global Depository Receipts after passing a special resolution at the general meeting of the company.
2. A company shall not be permitted to issue shares at discount (with the exception of sweat-equity shares) and any such issue shall be void.
3. In case of infrastructure projects, a company may issue redeemable preference shares for a period beyond 20 years, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders.
4. Further if a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue, it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.
5. Certain changes have been made with respect to issue of share certificates. The certificates of all securities allotted, transferred or transmitted shall be delivered:
(a) within two months after incorporation, in the case of subscribers to the memorandum;
(b) within two months from the date of allotment, in the case of any allotment of any of its shares;
(c) within one month from the date of receipt by the company of the instrument of transfer under sub-section (1) or, as the case may be, of the intimation of transmission under sub-section (2), in the case of a transfer or transmission of securities;
(d) within six months from the date of allotment in the case of any allotment of debenture.
6. A company has been prohibited form issue of shares with differential voting rights.
7. In case of reduction of share capital, an application should be made to the National Company Law Tribunal. The Tribunal shall give notice of such application to the Central Government and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company. The Tribunal shall take into consideration the representations, if any, made to it by that Government, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of such notice.
Deposits and Charges:1. Under the Bill, a company is not permitted, after commencement of this Act, to invite, accept or renew deposits from the public except on fulfillment of the conditions prescribed. The conditions are that, a company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, as may be agreed upon between the company and its members, subject to the fulfillment of the following conditions:
(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;
(b) filing a copy of the circular along with such statement with the Registrar thirty days before the date of issue of the circular;
(c) depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial year next following, in a Deposit Repayment Reserve Account;
(d) providing such deposit insurance in such manner and to such extent as may be prescribed;
(e) certifying that the company has not defaulted in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and
(f) providing such security for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the company property or assets.
2. Further if a company makes any default in repayment of deposit, it shall not be permitted to reduce its share capital or declare any dividend on its equity shares.
3. If any person obtains an order for the appointment of a receiver for, or of a person to manage, the property, subject to a charge, of a company or if any person appoints such receiver or person under any power contained in any instrument, he shall, within such time as may be prescribed, give notice of such appointment to the company and the Registrar along with a copy of the order or instrument and the Registrar shall, on payment of the prescribed fee, register particulars of the receiver, person or instrument. Any person so appointed shall, on ceasing to hold such appointment, give to the company and the Registrar a notice to that effect and the Registrar shall register such notice.
4. A suit may be filed by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus.
Management and Administration:1. Under the Companies Bill, 2009, every company is required to maintain, in addition to a Register of Members or Debenture Holders, a Register of any other Security Holders.
2. In respect of Annual Return, a company is required to make further disclosures over and above those prescribed under the current Companies Act. The time period within which a company is required to file the annual return has been shortened. The Annual Return is required to be filed within 30 days from the date of the Annual General Meeting or last date on which the meeting should have been held. In addition, if a company does not have a Company Secretary, then the Annual Return is required to be signed by a Company Secretary in whole-time practice.
3. The provisions relating to Statutory Meeting and Statutory Report have been dispensed with.
. The First Annual General Meeting of the company is required to be held within nine months (as opposed to 18 months as prescribed under the current Companies Act) from the end of the first financial year.
5. Business Hours requisite to hold the Annual General Meeting, have been defined as 9 A.M. to 6 P.M.
6. Separate provisions have been prescribed in respect of Representation of Presidents, Governors and Body Corporates at meetings of the company by such person as it thinks fit.
7. Notice of the general meetings is required to be given to each Director of the company. Further, notice of the general meetings may be given through approved electronic modes.
8. In respect of Explanatory Statement, if any item of special business to be transacted at a meeting of the company relates to or affects any other company, the extent of shareholding interest in that other company of every director, manager, if any, and of every other key managerial personnel of the first mentioned company shall, if the extent of such shareholding is not less than two per cent. of the paid-up share capital of that company, also be set out in the statement.
9. Under the current Companies Act, in the case a company having a share capital, poll can be demanded by the members present in person or by proxy and having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less than 50,000 rupees has been paid up. Under the Companies Bill, the minimum paid up amount has been raised to 5,00,000 Rupees.
10. Under the current Companies Act, the provisions with respect to voting by postal ballot are applicable only to a listed company. But under the Companies Bill, such provisions are applicable to all company.
11. A new provision has been made by which, every listed public company shall prepare in the prescribed manner a report on each annual general meeting including the confirmation to the effect that the meeting was convened, held and conducted as per the provisions of this Act and the rules made there under, within thirty days of the conclusion of the annual general meeting.
Declaration and Payment of Dividends:1. Under the Companies Bill, it is left to the discretion of the company to determine the percentage of profits to be transferred to reserves and the minimum requirement of 10 percent has been dispensed with.
2. Under the current Companies Act, if the company has incurred any loss in any previous financial year or years, which falls or fall after the commencement of the Companies (Amendment) Act, 1960, then, the amount of the loss or an amount which is equal to the amount provided for depreciation for that year or those years whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid or against the profits of the company for any previous financial year or years, arrived at in both cases after providing for depreciation. But this provision has been omitted under the Companies Bill.
3. If owing to inadequacy or absence of profits in any financial year, the company proposes to declare dividend out of the accumulated profits earned by it in the previous financial year or years and transferred by it to the reserves, such declaration shall be made by a resolution passed at a meeting of the Board with the consent of all the directors and the approval of the financial institutions whose term loans are subsisting, and thereafter in accordance with a special resolution passed by the shareholders at an annual general meeting.
4. In addition, a company is permitted to declare interim dividend out of profits of part of the year.
1. A company has been permitted to keep books of accounts and other relevant papers in electronic mode in such manner as maybe prescribed.
2. Annual Financial Statement is required to include the cash flow statement.
3. A holding company is required to prepare and file, in addition to its own financial statements, a consolidated financial statement of its subsidiary and itself.
4. Under the Bill, the Central Government is required to prescribe the auditing standards (as opposed to the Institute of Chartered Accountants of India (ICAI) under the current Companies Act). It shall be mandatory for companies to follow these auditing standards in addition to the accounting standards.
5. If the financial statements are adopted at the Annual General Meeting, then they shall be filed with the Registrar provisionally within 30 days form the date of the meeting.
6. The Directors’ Responsibility Statement to be filed along with the financial statements of the company shall state that
(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
(c) the had taken proper and sufficient care for the maintenance of adequate accounting directors records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis; and
(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls have been complied with.
Auditors and Audit:1. If at the Annual General Meeting the auditor is not appointed or re-appointed, then the existing auditor shall continue to be the auditor of the company.
2. If an Audit Committee has been constituted, then the appointment and filing of casual vacancy shall be made based on the recommendations of the Audit Committee.
3. In case of appointment of cost auditor, resolution should be passed at the Board meeting and no Central Government approval is necessitated.
4. Stringent provisions have been introduced, to prevent interested parties from being appointed as auditors. The following persons shall not be eligible for appointment as an auditor of a company, namely:—
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(d) a person who, or his relative or partner—
(i) is holding any security of the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company, of value in terms of such percentage as may be prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company; or
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;
(e) a person or a firm who has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
(f) a person whose relative is in the employment of the company as a director or key managerial personnel;
(g) a person who is in employment elsewhere or a person or firm who holds appointment as an auditor in companies exceeding such number as may be prescribed on the date of his appointment.
5. If an auditor is to removed before the expiry of his term, a special resolution is required to be passed at the Annual General Meeting of the company. Similarly a special resolution is mandated when a retiring auditor is not re-appointed or another auditor is appointed in his place.
6. The auditor appointed by a company should attend the general meetings of the company, unless specifically exempt by the company. He/she has the right to be heard in such meetings.
7. The auditor is permitted to render the following services to the company only pursuant to the approval of the Board of Directors or the Audit Committee.
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services; and
(h) management services.
8. The Audit report required under the Companies Bill, 2009 imposes certain compliance requirements in addition to the provisions of the current Companies Act, 1956.The audit report prepared by the auditor should state in case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board and in case of listed companies, whether the company has complied with the internal financial controls and directions issued by the Board. Further, the report must be in accordance with the auditing standards.
The Companies Bill, 2009 is intended to modernize the structure for corporate regulation in India and represents a major reform statement by the Government to promote the development of the Indian corporate sector through enlightened regulation. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2009 together with omission of existing unwanted and obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner.
Chapter I-X of the Bill deals with various substantive and procedural aspects relevant to a company. On the other hand, existing unwanted and obsolete compliance requirements have been omitted and on the other stringent provisions have been introduced to fill the lacunae and under the existing Companies Act, 1956.
The Companies Bill, 2009, thus, will enable the corporate sector in India to operate in a regulatory environment of best international practices that foster entrepreneurship, investment and growth.
1. Saharay H.K., Company Law, 5th Edition, 2008, Universal Law Publishing co.
2. Ramaiya A. and Others, Guide to Companies Act, 14th Edition 1998, Wadhwa and Company, Nagpur
3. Chakrabarti A.M., Taxman’s Company Law, 1994, Volume 1, Taxman Allied Services Pvt. Ltd.
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ISBN No: 978-81-928510-0-6