CHAPTER 1:INTRODUCTION.
The whole issue of corporate governance became a matter of concern especially because of the process of globalization and particularly the investment by the foreign financial institutions in the emerging markets. The investors had to ensure that the companies in which they invested were not only managed properly but also had proper corporate governance. Management involves the optimum use of the resources available for an enterprise like human, physical & financial resources as well as time. Corporate governance relates to the issue of the framework of values under which an enterprise performs. We have come across companies which apparently were very efficiently managed but which came to grief because the governance was not all right. We have also seen companies, which are considered blue chip companies even in India
The Government is keen to ensure that there is effective management of the large investigations undertaken by Companies Act inspectors. Administrative measures are being reviewed in order to help avoid prolonged and unduly expensive inspections. However, there is also a need for new statutory provision. A new power will be introduced to enable the Secretary of State to direct Companies Act inspectors, both at the outset of and during the life of an inspection, as to the scope, conduct, timing and certain other matters in relation to their investigation, and to discontinue an investigation.
Additionally, there will be an amendment to section 8 of the Company Directors Disqualification Act 1986 so that the Secretary of State can make a decision to apply to the Courts for the disqualification of a company director in the light of any information obtained by Companies Act inspectors, without the need for the information to be included in a report by such inspectors.
Thus also various provisions were included in the companies act of 1956 which lay down the statutory requirements relating to the inspection and investigation of the affairs of a company.
As per the Sec 209 of the Act Books of account to be kept by company. (1) Every company shall keep at its registered office proper books of account with respect to: (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place ;
(b) all sales and purchases of goods by the company ;
(c) the assets and liabilities of the company ; and
(d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labor or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account :
Provided that all or any of the books of account aforesaid may be kept at such other place in
(2) Where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarized returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1).
(3) For the purposes of sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein,
(a) if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions ; and
(b) if such books are not kept on accrual basis and according to the double entry system of accounting.
(4) The books of account and other books and papers shall be open to inspection by any director during business hours.
(4A) The books of account of every company relating to a period of not less than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account shall be preserved in good order : \Provided that in the case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of account preserved.
(5) If any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own willful act been the cause of any default by the company there under, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both :
Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defense to prove that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.
(6) The persons referred to in sub-section (5) are the following, namely:
(a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and;
(b) [Omitted]
(c) [Omitted]
(7) If any person, not being a person referred to in sub-section
(8), having been charged by the managing director, manager or Board of director, with the duty of seeing that the requirements of this section are complied with, makes a default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both.
Also according to Sec 209A - Inspection of books of account, etc., of companies.
(1) The books of account and other books and papers of every company shall be open to inspection during business hours:
(i) by the Registrar, or
(ii) by such officer of the Government as may be authorized by the Central Government in this behalf ;
(iii) by such officers of the Securities and Exchange Board of India as may be authorized by it
Provided that such inspection may be made without giving any previous notice to the company or any officer thereof :
(2) It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify.
(3) It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give.
(4) The person making the inspection under this section may, during the course of inspection,
(i) make or cause to be made copies of books of account and other books and papers, or
(ii) place or cause to be placed any marks of identification thereon in token of the inspection having been made.
(5) Notwithstanding anything contained in any other law for the time being in force or any contract to the contrary, any person making an inspection under this section shall have the same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely :
(i) the discovery and production of books of account and other documents, at such place and such time as may be specified by such person ;
(ii) summoning and enforcing the attendance of persons and examining them on oath ;
(iii) inspection of any books, registers and other documents of the company at any place.
(6) Where an inspection of the books of account and other books and papers of the company has been made under this section, the person making the inspection shall make a report to the Central Government or the Securities and Exchange Board of India in respect of inspection made by its officers.
(7) Any officer authorized to make an inspection under this section shall have all the powers that a Registrar has under this Act in relation to the making of inquiries.
(8) If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees, and also with imprisonment for a term not exceeding one year.
(9) Where a director or any other officer of a company has been convicted of an offence under this section he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years from such date.
As per Sec 235 - Investigation of the affairs of a company.
(1) The Central Government may, where a report has been made by the Registrar under sub-section (6) of section 234, or under sub-section (7) of that section, read with sub-section (6) thereof, appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct.
(2) Where(a) in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and
(b) in the case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company's register of members,
the Company Law Board may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct.
Also according to the Sec 237 - Investigation of company's affairs in other cases.
Without prejudice to its powers under section 235, the Central Government
(a) shall appoint one or more competent persons as inspectors to investigate the affairs of a company and to report thereon in such manner as the Central Government may direct, if the company, by special resolution ; or
(ii) the Court, by order, declares that the affairs of the company ought to be investigated by an inspector appointed by the Central Government ; and
(b) may do so if, in the opinion of the Company Law Board, there are circumstances suggesting
(i) that the business of the company is being conducted with intent to defraud its creditors, members or any other persons, or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members, or that the company was formed for any fraudulent or unlawful purpose ;
(ii) that persons concerned in the formation of the company or the management of its affairs have in connection therewith been guilty of fraud, misfeasance or other misconduct towards the company or towards any of its members ; or
(iii) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect, including information relating to the calculation of the commission payable to a managing or other director, or the manager, of the company.
PROVISIONS GIVEN IN THE MRTP ACT
An important organ of the Ministry of Company Affairs is the Monopolies and
Restrictive Trade Practices Commission (MRTP Commission), which is a quasi-judicial body.
The MRTP Commission established under Section 5 of the Monopolies and Restrictive
Trade Practices Act, 1969, discharges functions as per the provisions of the Act. The main function of the MRTP Commission is to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. In regard to monopolistic trade practices, the Commission is empowered under Section 10(b) to enquire into such practices (i) upon a reference made to it by the Central Government or (ii) upon its own knowledge or information and submit its findings to Central Government for further actions.
The Director General of Investigation and Registration functions in terms of Section 8 of
the MRTP Act for making investigations for the purpose of the Act, for maintaining a register of agreements subject to registration under the Act and also for performing such other functions assigned to him under the Act.
CHAPTER 2: INVESTIGATION BY DEPT OF COMPANY AFFAIRS AND THE SEBI
The Government in the Department of Company Affairs (DCA) carried out inspection of the books of accounts of 199 companies during the first nine months of 2001-2002 ending December 2001. This has been stated in the Annual Report of the DCA for 2001-2002. During 2000-2001, the books of accounts of 221 companies were inspected under Section 209A of the Companies Act, 1956. During 1999-2000, inspection of the books of accounts of 230 companies was carried out. In 1998-99, the DCA carried out inspection of the books of accounts of 255 companies.
The information brought out in the inspection reports, was made use of for considering action under the provisions of the Companies Act. Prosecutions were launched on the basis of findings in the inspection reports. Besides, cases involving non-compliance of the Companies Act, 1956 including inadequate maintenance of statutory records noticed during such inspection were taken up with the companies for necessary remedial action. In addition, information of interest to other Government Departments and agencies as brought out in the inspection reports were communicated to them for suitable action.
During 2001-2002, Securities and Exchange Board of India (SEBI) investigated the affairs of various companies involved in stock market scam 2001. Based on the preliminary investigation report of SEBI, the DCA ordered inspection under Section 209A of the Companies Act of books of accounts and other relevant records of 98 companies. Prosecutions of a number of companies and their directors and officers in default were ordered for violation of the various provisions of the Companies Act as reported in the inspection reports. Extracts of the reports were sent to SEBI, Reserve Bank of India (RBI), Income Tax Authorities and other Government agencies for action as deemed appropriate at their end.
The inspection of companies under Section 209A of the Companies Act were mainly ordered on the basis of the complaints received in the DCA or in its field offices about mismanagement, delay in transfer of shares or debentures, delay in issue of dividend warrants, suggestions of the regional directors due to qualifications in the auditors’ report, other violation or irregularities noticed on scrutiny of documents filed in the offices of Registrar of Companies, reference received from other Government departments and agencies pointing out violation of provisions of the Companies Act or other irregularities.
CHAPTER 3:CASE ANALYSIS
CASE 1: Reserve Bank of India
Facts:
M/s JVG Finance Limited (in liquidation was a non-banking financial company. Such require license from RBI to continue/carry on their business. The RBI also has necessary powers to conduct investigation into the affairs of these companies to ensure that they are doing the business in accordance with the provisions of the RBI Act and are complying with various directions issued by it from time to time. Since it became a non-banking financial company coming under the regulatory authority of RBI under Chapter 3 of the RBI Act an inspection of the company was carried out and many irregularities were found. The company submitted an application dated 23rd June, 1997 for issue of a certificate of registration under the provisions of Section 45IA of the RBI Act.
On this application the company was inspected during the period from December, 1997 to January, 1998 and again many irregularities were found and, therefore, show cause notice was issued as to why the application for issue of certificate of registration be not rejected. Ultimately, after the show cause notice application for certificate of registration was rejected. In the absence of certificate the company became disqualified to carry on the business of non-banking financial institutions.
The RBI, accordingly, filed CP No. 265/1998 under Section 45 MC of the RBI Act for its winding up. Vide order dated 5th June, 1998 this court admitted the petition and appointed the Official Liquidator (OL) attached to this court as the Provisional Liquidator with direction to take charge of all the assets and properties of the company along with books of accounts and other records. He was also directed to take immediate custody of all the assets belonging to the company. Pursuant to these directions, the OL sprung into action and has taken charge of various properties. Liquidation proceedings were underway in CP No. 265/1998.
Thus in this case it was seen that the company became disqualified to carry on the business of non-banking financial institutions following the inspection and investigation of the affairs .
Case 2:Land mark case of INDRA PRAKASH KARNANI AND OTHERS
v.
REGISTRAR OF COMPANY AND OTHERS[2]
The aforesaid case before the Metropolitan Magistrate arose out of a petition of complaint filed by the Registrar of Companies, West Bengal, under Section 209A(8) of the Companies Act, 1956, impeding the present petitioners as accused. It was alleged that Poobong Tea Co. Ltd. was incorporated under the Indian Companies Act, 1913, on March 27, 1923, having its registered office at 44, Strand Road , Calcutta fifth Court Strand Road , Calcutta Darjeeling
Case 3: Khandwala Securities Limited v. Kowa Spinning Limited and Ors. and Ors
The main complaint of the petitioners in this petition filed under Sections 397/398 of the Companies Act, 1956 (the Act) is that the respondents 2 and 3 had mis-utilized/diverted the funds raised by way of issue of shares in M/S Kowa Spinning Limited (the company).
The facts of the case are that the 2nd and 3rd respondents, who are promoters of the company entered into an agreement with the petitioners on 20th October, 1994 (Sponsorship Agreement). As per this Agreement, the petitioners, acting as sponsors under the said Agreement purchased 20.8 lakh equity shares of the company at Rs. 20/- per share including a premium of Rs. 10/- per share for a total consideration of Rs. 416 lacs which constituted 48.87% of the shares in the company. In terms of the Agreement, the petitioners were to offer the said shares to general public. To enable the petitioners to do so, the Agreement stipulated various responsibilities on the company arid the respondents. According to the petitioner, the company and the respondents failed to comply with the various terms of the Agreement. It is also the allegation of the petitioner that the money invested by the petitioners has been diverted to other companies under the control of the 2nd and 3rd respondents either by way of loan or by way of investment in market securities. This action of the respondents, according to the petitioners, was not only in violation of the provisions of Section 372 of the Act but also against the spirit of the "bought out deal". By the failure of the company and the respondents in making available the requisite information, the petitioners could not prepare offer of sale document. In spite of the request of the petitioner for appointment of his nominee on the Board, the respondents failed to do so. The company also did not act on the suggestion of the petitioners for appointment of special auditors to inspect and investigate into the financial affairs of the company with a view to safeguard the interest of the shareholders. The company had not taken delivery of certain machinery for which orders were placed. The company never offered for inspection the books of accounts of the company and also the details of the loans and advances given by the company. Even though, the petitioners held substantial shares in the company, notices for Board Meetings were not received by him. Due to non receipt of notices for the general meetings on 5th September, 1995, 30th December, 1996 and EOGM on 5th January, 1996, the petitioners could not exercise their right as shareholders. Even the dividends declared had not been paid to the petitioners on the ground that the resolution declaring dividend had been later on revoked. In terms of Section 163 of the Act, a representative of the petitioners inspected the documents of the company and found that many statutory records were not available and the company had failed to furnish copies of those documents inspected. Accordingly, the petitioners have complained that the respondents are conducting the affairs of the company fraudulently and in violation of the provisions of the Companies Act. With these allegations, the petitioners have sought for various reliefs inter alia including for a direction to the company/respondents 2 to 7 to purchase the shares held by the petitioners.
The respondents filed an application under Section 8 of the Arbitration & Conciliation Act, 1996 on the ground that the sponsorship agreement under which the petitioners acquired shares in the company contained an arbitration clause and since most of the allegations in the petition relate to the alleged breach of the terms of the arbitration agreement, the dispute should be referred to arbitration. This application was heard and a detailed order was passed on 28th June, 1999 rejecting the application on the ground that even though the petition contained certain allegations pertaining to the terms of the sponsorship agreement, some of them were independent of that agreement and as such this Board has the power to examine the allegations which were independent of the sponsorship agreement. Accordingly, the respondents were directed to restrict their replies only to those allegations which were not related to the terms of the sponsorship agreement.
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