HOW TO REGISTER UNREGISTERED COMPANIES AS COMPANIES UNDER THE COMPANIES ACT, 1956

The Companies Act, 1956 was rooted in an environment that spawned the license and permit raj in India. Though the Act has been amended on more than two-dozen occasions, presumably to keep in tune with the changing and liberalized environment, doubts have been expressed lately on the continued validity of the very structure of the Act. The relevance or applicability of a large number of provisions to private companies, which are often not more than mere family enterprises, has been justifiably questioned.

The need for revisiting the law governing private companies, with a view to providing a simple and cost-effective framework, cannot be over emphasized. Keeping this in mind, the Government constituted this Committee in January, 2003 to suggest a more scientific and rational regulatory environment, the hallmark of which is the quality, rather than the quantity, of regulation, with particular reference to:

(a) The Companies Act, 1956; and

(b) The Indian Partnership Act, 1932.

Advantages conferred on business entities formed as companies are those of perpetual succession and limited liability. A degree of regulation is a natural concomitant of these privileges. The Committee is convinced that regulation should be the minimum necessary for small family type of concerns, which have little or no significant public interest. The suggestion that such entities be completely deregulated, on the ground of their being nothing but glorified partnerships is a tempting one, but the Committee recognizes there should ordinarily be no privilege without a countervailing and proportionate accountability. There is clearly a need to strike a balance.

The Companies Act, 1956 places companies in three categories : public companies, private companies and private companies which are subsidiaries of public companies. It was argued before the Committee that companies need be classified only as public or private. However, the Committee, after detailed deliberations, came to the conclusion that for the law to remain meaningful in its application, there was a need for a further classification among private companies in applying various provisions of the Act. The new sub-classification within the category of private companies, should be that of a “small private company”, small by virtue of its paid-up capital and free reserves, or turnover, or aggregated annual receipts to paid-up capital ratio. This new class of companies should be exempted from having to comply with such provisions of the Act as the Government may notify from time to time. This is in line with what the Government does for Government companies, by virtue of powers derived from section 620 C of the Act.

We should acknowledge that private companies cannot be seen in isolation or as self-contained entities. As is well known, some private companies can be quite big in terms of capital employed and/or turnover. Very often they have close relationships and significant transactions with public or listed companies. In fact, promoters of listed companies have often used private companies, which they own or control, indirectly, as vehicles to siphon-off funds of the listed companies. A dilemma occurs when private companies undertake activities, given their nature or size, which are really akin in scale to a public company. The scheme of erstwhile section 43A, converting private companies into public companies automatically, to address the problem, did not work well; as a result section 43A was finally made inoperative in December, 2000. We should, however, note the need to address the issue of inter-relationships, and the possibility of misuse of private companies as vehicles of convenience, specially if regulation on such companies was further relaxed.

Section-by-section analysis reveals that numerous requirements of compliance provided under the Act, meant primarily for public companies are unnecessarily applicable to private companies, including to private companies, which are “small”. This has added to compliance costs without adding value; and in the case of most of private companies, such requirements can be time-consuming and unduly burdensome.

Misuse of private companies by certain unscrupulous entrepreneurs should not force a majority of small private companies to having to face the extensive rigours of compliance with the law. Onerous and, at times, unnecessary compliance requirements have, in fact, inundated the offices of the RoCs with paperwork, which is difficult for them to handle or file, much less examine in any meaningful way.

Keeping in mind the above, the focus should be on :

(a) providing adequate flexibility to companies/firms conducting, or intending to conduct business or provide professional services;

(b) providing a structural environment conducive to growth and prosperity of the entities, being mindful of the impact on various stakeholders, and effective regulation in a manner that minimises and deters exploitation of the liberalised provisions by unscrupulous elements; and

The following are the broad areas of reforms for private companies:

(a) specifying benefits/exemptions that can be extended to all private companies irrespective of size(including unregistered companies); and

(b) determining the criteria for a private company to qualify as a “small private company” (SPC) ,i.e., unregistered companies (UC) and extending extra benefits/exemptions to them.

The criteria which could be applied for determining small private companies

Determining the definition of an UC is of critical importance. It is recommended:

i The current distinctions between private companies, public companies, and private companies that are subsidiaries of public companies, as provided in the Act need not be disturbed.

i However, ‘small’ private companies(SPC or UC OR UNREGISTERED COMPANIES) may be distinguished and singled out for special treatment.

i A SPC would be a private company that :

(a) has a paid-up capital and free reserves of Rs. 50 lacs or less, or as may be prescribed from time to time;

(b) has an aggregated annual receipts from sales/services, not exceeding Rs. 5 Crores;

(d) is registered as a SSI (small scale industry) unit, notwithstanding its paid-up capital or aggregate annual receipts.

i If any UC(SPC) crosses the threshold limits provided either in (a), (b) or (c) above, it will be treated at par with other private companies, and exemptions available to a UC will not be available to such companies for the financial year in which the threshold is crossed, and two financial years thereafter.

For the purposes of this project, “other receipts” are any and all sums received by the company whether by way of security deposits, deposits, trade advances, other advances or any other sums by whatever name called (other than receipts from sales/services).

Section 13(1)(d) of the Companies Act, 1956 lacks clarity regarding the question of what constitutes incidental objects. This lack of clarity has caused companies to draft lengthy incidental objects clauses, in the nature of an umbrella provision. A standard format of incidental objects should be made available for use by all private companies.

A standard format of incidental objects should be prescribed for all private companies who should then not be required to have any other “Incidental Objects”. The proposed format for the incidental objects clause is:

“In connection with the main objects, the Company shall have the power to invest its funds in real property and securities, to borrow and make advances, to acquire, own, and dispose of real and personal property, and to do all other acts incidental and necessary, as may be prescribed, for the accomplishment of the purposes stated in the main objects clause.”

There should not be ‘other objects clause’ in the MoA in the case of UCs.

To avoid stepping beyond the scope of the main objects, companies often list an unduly large number of main objects in the MoA. In such a situation, the sanction of members is no longer required, as per section 17 of the Act, even if the company decides to substantially change the nature and scope of its business. Allowing an SPC to have multiple objects is likely to lead to misuse.

Only companies that have a single main object will qualify as UC, and enjoy the exemptions available to UCs. Existing companies can amend their object clauses to a single main object clause, by following the procedure laid down in section 17 of the Act, if they want to avail of the benefits being offered to UCs.

Considerable hardship was being faced currently in getting extension of validity of the instrument of transfer under section 108(1D) of the Act. This is avoidable in case of a private company. Section 108(1A)(b)(ii) of the Act be appropriately amended so that in the case of private companies the validity of the instrument of transfer of its shares is one year from the date of presentation before the prescribed authority.

In a private company, members are few and have substantial involvement in the management. In such a scenario, the consent of members by way of a special resolution is a formality, and therefore, the power to change the location of the registered office may be given to the board of directors, but the decision should be communicated to all the members. Unless otherwise provided in the articles of association of a private company (the “AoA”), an unregistered company may shift its registered office with the approval of its board of directors, provided all members are notified of the decision before its actual implementation.

Register of members is to facilitate the determination of the entitlement of the members to dividend etc., which are matters of greater significance in public and listed companies. We believe that the requirement of advertisements in newspapers about closure of the register of members is not necessary in case of private companies. Unless otherwise provided in the AoA, a private company should be exempt from having to give prior notice through an advertisement in a newspaper about the closing of its registers of members and debenture-holders.

Few unregistered companies have foreign registers, and since unregistered companies or private companies are unlikely to have wide public interest, the requirement of advertisement, as provided under section 158 of the Act, should, therefore, be dispensed with. Unless otherwise provided in the AoA, an unregistered company be exempt from giving previous notice by an advertisement in a newspaper of the closing of its foreign register. The details of the foreign registers maintained by a unregistered company (small private company) should be mentioned in the annual return or directors’ report.

Annual return provides inter alia that information regarding the capital structure, registered office, the board of directors, the members and debenture-holders and indebtedness of the company. All this information can be given instead in the directors’ report. Ordinarily, disclosure by a private company (in the present case an unregistered company) of its members is not of importance as the private companies are closely held and controlled, and change in the share-holding is not a regular feature as it is in the case of listed companies. Unregistered companies may be given a one time option to either file an annual return or include in the directors’ report a compliance statement with respect to the provisions of section 3(1)(iii) of the Act, information as to unpaid dividends, if any, and the directors comprising the board, and changes in its members or their shareholding since the last AGM. Appropriate amendments be carried out to sections 159 and 217 of the Act to provide for such an option to a private company.

A company needs to follow a very detailed procedure for calling an extra-ordinary general meeting by members, in terms of section 169 of the Act, and for circulation of members’ resolution under section 188 of the Act. These provisions are not so necessary in case of unregistered companies, which are generally member-managed. An unregistered company should be allowed to provide in its AoA the manner and time- frame in which an extra ordinary general meeting of such company can be called on requisition of its member(s). However, this should, where approvals are concerned, be with reference to members entitled to vote, and not members present and voting. Appropriate amendments be made to sections 169 and 170 of the Act to give effect to this recommendation to smoothen the functioning of unregistered companies.

An unregistered company should be allowed to provide in its AoA the manner of circulation of members’ resolutions. Appropriate amendments be made to sections 188 and 170 of the Act to give effect to the recommendation.

Under the Act, there are no provisions permitting written resolutions in lieu of general meetings. Holding general meetings, to pass such resolutions, is cumbersome and involves unnecessary expenditure. We feel that this could be very burdensome on unregistered companies. Unregistered companies may pass written resolutions by circulation. If passed by circulation, ordinary resolutions will require a simple majority of those eligible to vote and special resolutions will require three-fourth majority of those eligible to vote. Such resolutions should be recorded in the minutes book within 30 days of passing thereof. Further, resolutions thus passed should be taken note of in the very next meeting, and the minutes of the very next meeting must record that such resolutions are noted, and approved.

Unregistered companies will be required, as before, to hold annual general meetings; these cannot be done away with. However, if unregistered companies have only two members, then they may even hold the annual general meeting by circulation. Resolutions passed in the meeting so held, should be recorded in the minutes book within 30 days of passing thereof. Written resolutions can be passed through various forms of electronic communication, provided there is compliance with the Information Technology Act, 2000 and other applicable laws.

We believe that unregistered companies should be free to deal with their managerial resources in the manner they deem fit, since public funds are not at stake. The provisions of section 197A of the Act should not be applicable to unregistered companies. Sections 205 and 205A of the Act deal with the manner of calculation, and payment of dividend, aimed at protecting the interests of investors. These provisions are important in the case of listed companies. They seem to serve no real purpose in case of unregistered companies.

Unregistered companies should be exempted from having to deposit the funds for dividend in a separate bank account and transferring the unpaid dividend amount to a special dividend account. Unless otherwise provided in the AoA, unregistered companies should have the freedom to deal with the unpaid dividend until its transfer to Investor Education and Protection Fund pursuant to the provisions of sections 205B and 205C of the Act. Appropriate amendments be made to the Act and the (Transfer of Profits to Reserves) Rules, 1975 to give effect to this recommendation.

Unless the AoA otherwise so provide, unregistered companies should be exempted from the restrictions and the requirement of having to seek the approval of the Government, for payment of interest out of capital. The requirement of authorisation under the AoA to make such payments should continue to be retained in section 208 of the Act. The anomaly in Section 257 of the Act, that seems to have arisen at the time of insertion of sub-section (1A) through the Act of 1960, without consequential amendment in the sub-section (2), needs to be removed. Sub-section (2) of section 257 may be amended to provide that the provisions of the section shall not apply to a unregistered company, unless it is a subsidiary of a public company.

Unregistered companies should have the flexibility to hold board meetings as per business exigencies, as the volume of business transacted by these companies is significantly less than public companies. The requirement related to Board meetings should be relaxed for unregistered companies. Unless otherwise so provided in the AoA, UCs should be required to hold board meetings atleast once in a calendar year. The provisions of section 292 of the Act should not be applicable to an UC. UC should be allowed to provide in its AoA the manner for dealing with the matters mentioned in section 292 of the Act.

In unregistered companies, most of the members are normally represented on the board itself either directly or through nominee directors, and accordingly, they should have freedom and flexibility to contractually determine in their AoA, the manner, terms and conditions on which sole selling agents can be appointed. The provisions of sections 294 and 294AA of the Act should not be applicable to unregistered companies. The AoA of unregistered companies should provide for the manner, terms and conditions on which sole selling agents can be appointed.

The requirements of the section 297 for broad sanction, are aimed at strengthening transparency and corporate governance measures, and, are therefore, of significance in the case of public companies alone. The provisions of section 297 of the Act should not be applicable to unregistered companies. The AoA of unregistered companies should provide for the manner of, and restrictions with regard to, entering into contracts of the nature mentioned in section 297 of the Act.

The unregistered companies are ordinarily member-managed companies and therefore separate disclosures to the members informing them of the terms of or variations in management contracts under section 302 are not required. The provisions of section 302 of the Act should not be applicable to unregistered companies. Unregistered companies should be required to get the terms of the management contracts or variations therein approved at the meeting of their board of directors unless the AoA of such companies provide for a different manner to deal with management contracts.

Unregistered companies, generally being member-managed, should have the flexibility to decide the manner of appointment of alternate directors. The provisions of section 313 of the Act should not be applicable to unregistered companies. The AoA of unregistered companies should provide for the manner of appointment of an alternate director.

The stiff competition prevailing in the business environment has set in the encouraging trend of companies having to be managed more professionally. This leaves less room for the management of a unregistered private company to fill in an office of profit by their kith and kin, unless they are capable of handling the responsibilities. We believe that the provisions of section 314 of the Act acts as an obstacle to an unregistered private company in using the services of a capable person from within the family for managing the business. The provisions of section 314 of the Act should not be applicable to unregistered companies.

The compensation that can be paid to the managerial personnel mentioned in section 318 of the Act in the event of loss of office, etc. should be contractually determined in case of an unregistered company on the basis of contract law, viz. the law of damages. However, restrictions can be placed by the members in the AoA of such companies. Section 318 of the Act be appropriately amended so that sub-section (4) of this section is not applicable to unregistered companies. Unregistered companies may provide for compensation for loss of office in the AoA of the company.

Infact, many individual laws regarding all the different types of unregistered companies could be successfully incorporated in the companies act including all the abovesaid recommendations alongwith all the forthcoming recommendations.

Nearly, 90% of the 6 lakh companies in India are private companies whether registered or unregistered. According to the DCA, almost half of the companies do not even file their annual accounts and annual return. There is every likelihood that a very large number of such companies, have no operations and as such have not been carrying on any business. In addition, there are a large number of companies, particularly private companies, which have become defunct. In such cases, the promoters are no longer interested in the company. Such companies continue to exist on paper solely because putting them to permanent sleep (winding up) is costly and time-consuming.

The procedure laid down for exercise of power by RoC under section 560 of the Act to strike off the name of a defunct company is painfully slow and, in spite of that, the question of liabilities that a company might be carrying was not adequately addressed. As a result, RoCs have rarely, if ever, used the power given in the section. Unfortunately, companies themselves do not have a remedy under this section.

The Government have, in the past, issued schemes for making exit simpler. The Committee is, however, of the view that the solution should be permanent, and made part of law, and that the scheme should be such that it enables a company to exit, if it so wishes, in less than four months time.

In an increasingly litigious market environment, the prospect of being a member of a partnership firm with unlimited personal liability is, to say the least, risky and unattractive. In India, some bodies of professionals have been prohibited from practicing under an incorporated form. The ‘general partnership’ or partnership simpliciter has traditionally been the entity of choice to provide services by professionals such as lawyers, accountants, doctors, architects, and company secretaries.

We feel that with Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is high. Hence, in order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP(limited liability partnership) is self-evident. Such an entity would provide the flexibility of a partnership and limiting at the same time, the owner’s liability with respect to the LLP.

We should try to extend the scope of LLP to trading firms and/or manufacturing firms. In our view, the scope of LLP should, in the first instance, be made available to firms providing professional services only. In particular, there is no special advantage that small private companies or SSI or UC units might derive from being an LLP, especially in light of the fact that we are recommending a considerable easing of regulation on private companies, specially SPCs and accommodate unregistered companies within its ambit.

We feel that with Indian professionals increasingly transacting with or representing multi-nationals in international transactions, the extent of the liability they could potentially be exposed to is high. Hence, in order to encourage Indian professionals to participate in the international business community without apprehension of being subject to excessive liability, the need for having a legal structure like the LLP is self-evident. Such an entity would provide the flexibility of a partnership and limiting at the same time, the owner’s liability with respect to the LLP.

In our view, the scope of LLP should, in the first instance, be made available to firms providing professional services only. In particular, there is no special advantage that small private companies or SSI or UC units might derive from being an LLP, especially in light of all the above recommendations, a considerable easing of regulation on private companies and bringing in its ambit the functioning of unregistered companies, specially SPCs.

An LLP must be incorporated by using a formal mechanism of filing the incorporation document with the RoC. Further, there should be no restrictions on the number of partners in an LLP. Two or more professionals who wish to associate for the purpose of providing an identified professional service, may subscribe their names in an “incorporation” document in the prescribed form.

The relations inter se the partners and between the partners and the LLP may be governed by individual agreements between the parties concerned. Such agreement must be filed with the RoC; changes made in the agreement will also have to be filed with the RoC. The LLP agreement should contain information as may be prescribed by the Department of Company Affairs and even the above mentioned provisions should be complied with where the provisions relating to private companies have been so much liberalized so as to accommodate all the unregistered companies.

No limit be placed on the number of partners in an LLP. Any person may become a partner by entering into an agreement with the existing partners in the LLP. Further, when a person ceases to be a partner of an LLP he/ she should continue to be treated as a partner unless: (a) the partnership has notice that the former partner has ceased to be a partner of the LLP; or (b) a notice that the former partner has ceased to be a partner of the LLP has been delivered to the RoC. A partner having resigned from an LLP would continue to be liable for acts done by him during his tenure as member of the LLP.

LLPs should be regulated and administered by the Central Government to ensure uniform standards, and since many of the State Governments might not have adequate infrastructure and expertise for ensuring effective regulation.

As opposed to the concept of joint and several liabilities, applicable in general partnerships, the liability for partners in a LLP should be limited. However, the partners would still continue to be liable for their personal acts which are not done for and on behalf of the LLP, and were committed in a personal capacity; for example, if a partner knowingly commits a felony or tort involving the LLP. Provisions dealing with insolvency, winding up and dissolution of an LLP should be similar to those provided for private companies in the Companies Act, 1956.

Every partner of the LLP would be an agent of the LLP. However, an LLP would not be bound by anything done by a partner in dealing with a person if (a) the member in fact had no authority to act for the LLP by doing that act; and (b) the person knows that he has no authority or does not know or believe him to be a partner of the LLP.

(a) Where a partner of the LLP is liable to any person or entity as a result of his wrongful act or omission in the course of the business of the LLP, the LLP would be liable in such circumstances. However, the partner would be liable only to the extent of his/her contribution to the LLP.

(b) In the event of an act carried out by a LLP, or any of its partners, fraudulently, the liability would not be limited; it would, in fact, become unlimited as provided for in section 542 of the Companies Act, 1956.

(d) The provisions relating to insolvency, winding up and dissolution of companies as contained in the Companies Act, 1956 may be examined and suitably modified to conform to the philosophy of LLPs. The partners may have to contribute to the assets of the LLP in the manner provided for in this regard.

To protect the interest of persons who might have claims against an LLP, all LLPs should be compulsorily required to take out an insurance policy that would cover, to a reasonable extent, its liabilities as a body corporate. There should be insurance cover and/or or funds in specially designated, segregated accounts for the satisfaction of judgments and decrees against the LLP in respect of issues for which liability may be limited under law. The extent of insurance should be known to, and filed with the RoC, and be available for inspection to interested parties upon request.

The standards of financial disclosure as applicable to private companies should be made applicable to an LLP. The advantages gained from having the privilege of limited liability should be coupled with the responsibility of making adequate financial disclosure so as to minimize chances of fraud and mismanagement. The standards of financial disclosures would be the same as, or similar to, that being prescribed for private companies subject to privilege already available between a professional and his or her client in maintaining confidentiality.

The LLPs should be governed by a taxation regime that taxes the partners as individuals, rather than taxing the LLP itself, i.e., the LLPs should be treated in the same manner as the firm under the tax laws.

The Partnership Act provides a comprehensive framework for contractual relationships amongst partners, and the basis for a most popular form of organisation for small businesses. It is interesting to note that the Partnership Act has not been subject to any significant amendment since its enactment. Most of the organisations and individuals do not have any major complaint about the existing regulatory regime, except for certain administrative aspects of the functioning of the offices of the Registrar of Firms in different States.

43. The Partnership Act does not contain provisions for registration of charges, analogous to those contained in sections 124 to 145 of the Companies Act, 1956. Consequently, partnership firms find it difficult to access finances on terms applicable to corporates as lenders find it very difficult to verify the charges already created on the properties of the firm. Similarly, third parties proposing to deal with the firm are not able to exercise due diligence.

Being convinced of this, and being aware of the state of record-keeping in the offices of the Registrar of Firms, the Committee recommend as under :

The Partnership Act should be appropriately amended to provide a legal framework for registration of charges, on the lines of the provisions of the Companies Act, 1956 or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Banks and financial institutions also should be permitted to file the papers for registration of charge, wherever they provide assistance against the security of asset/s. The firms can, of course, themselves get the charge/s registered. In either case, the documents would have to be authenticated by both the secured creditor and the lender.

Charges should be registered either with the ROCs if the DCA is able to implement its comprehensive computerisation programme (DCA 21); alternatively, they can be registered with the Central Registry envisaged in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, if legally permissible and if the Registry is set up in time and has adequate reach across the country.

The partners are entitled to interest at the rate of 6% per annum under section 13(1)(d) of the Indian Partnership Act, 1932. This rate of interest was fixed in the year 1932, and has remained static. It would indeed be appropriate if Government is empowered to prescribe the rate of interest, to reflect, from time to time, realities of the market.

The bar on suits under section 69 of the Partnership Act should be restricted only to suits in respect of rights arising out of contracts entered in the course of business. Accordingly, it is recommended that amendments, on the lines suggested by the Law Commission of India, be initiated.

It is evident that banks, financial institutions and third parties are still reluctant to deal with partnership firms because the state of records of these firms, in various States, virtually rules out any sort of due diligence. The current state of affairs warrants radical measures and with urgency.

State Governments should be persuaded to computerise, within a given time-frame, all the records pertaining to partnership firms.

Failing that, Government should consider taking over the administration of partnership firms, once DCA’s computerisation programme (DCA 21) has been successfully implemented.

The scope of terms of reference requires the Committee to suggest a scientific and rational regulatory environment in the context of the Companies Act, 1956 and the Partnership Act, 1932. Thus, it extends to public companies as well, in addition to private or small private companies. Representations made by trade and industry argued for fuller empowerment of the company and its board of directors, in order to enable them to attract and retain the best talent, with minimal, suitable checks and balances. On the contrary, current thinking in the developed countries seems to be that managers have been reckless at times in rewarding themselves.

The Government may take note of the anomaly arising out of the insertion of clause (c) in section 3(1)(iv) defining a public company, through the Companies (Amendment) Act, 2000, and consider the need for appropriate amendment to remove the confusion that exists in interpretation and applicability of the provisions of the Act in relation to a private company which is a subsidiary of a public company. Either section 3(1)(iv)(c) can be altogether dropped or a suitable explanation provided below it to put the issue beyond doubt.

In order to attract professional and highly qualified individuals, to act as independent directors, on the board, they need to be paid adequate remuneration. Further, they should be exempted from certain civil and criminal liabilities, and onerous obligations and requirements.

The statutory limit on sitting fees should be reviewed, although ideally it should be a matter to be resolved between the management and the shareholders. In addition, loss-making companies should be permitted by special resolution to pay special fees to any independent director, subject to reasonable caps, in order to attract the best restructuring and strategic talent to the boards of such companies. Non-executive and independent directors should be exempted from criminal and civil liabilities as attracted under certain Acts, like the Companies Act, Negotiable Instruments Act, Provident Fund Act, ESI Act, Factories Act, Industrial Disputes Act, the Electricity Supply Act and SAFEMA. Though it is proposed to simplify the Act vis-à-vis private companies, the applicable laws other than the Act should also be appropriately streamlined to ensure that onerous obligations/requirements should not be imposed on the directors who are not in the whole-time employment of a private company and also ensure that no additional obligations/requirements are imposed on any of such directors. A non-obstante clause to the effect may be added.

Another reason that discourages good persons from becoming independent directors, which has been brought to our notice, is the apparent inability of directors to exit on their resigning. Surely, no law or procedure should be such that it compels a person to remain a director, on record, even if he does not want to be, and continue to prosecute him or her for acts for which he is not liable. Action has to be taken to sort out this obvious anomaly.

Section 297 of the Act should be amended to provide for prescription of rules. Government should frame rules in a manner that prior approval of Government is not normally required, subject to certain safeguards that would protect public/stakeholder interest. In any case, section 297 should not apply to private limited companies and unregistered companies.

There is a need for providing adequate checks and balances to prevent situations where private and unregistered companies may also be used as vehicles of convenience to circumvent the regulatory regime applicable to public companies. Cases of corporate fraud, including the capital market scams, suggest a strong possibility of such misuse. A suitable mechanism in the law for blowing the whistle, as it were, if there is any unusual activity in the company—public or private.

Given the repeated exploitation of small depositors, we thought initially of that there should be prohibition from accepting deposits from the public. However, suggesting a total prohibition of a long-standing practice without adequate public debate on the issue should not be done. However, the need to safeguard depositors cannot be ignored.

We believe that if the professional firms in India have to benchmark themselves internationally and prepare for global competition, the number of partners that a firm can have should not be allowed to become a hurdle.

We believe that very small shareholders are an avoidable drain on the resources of their company. In some cases, the cost of keeping them informed and supplying them a copy of the annual report etc., might exceed the value of their total investment in the company. While it is a very popular thing to show great concern for the small shareholders, the fact remains that the system has failed to protect them and many small gullible investors have lost their savings. It might be better, therefore, for those in charge of public affairs to be transparent and frankly inform small investors to be more careful or seriously consider making investments through reputable financial institutions and mutual funds.

CONCLUSION

In the end, what can be safely said about the prevailing legislations for the functioning of the companies of different kinds is that they have far outlived their utility. We need to do away with all the different legislations dealing with all the different types of unregistered companies and incorporate them in the companies act more in tune with the provisions relating to the functioning of the private companies but with the changes even in this mother legislation dealing with the companies. We must awake to the new economic realities of the twenty-first century. And should not leave ourselves any excuse for future regret, as we have been accused to have become accustomed to it, we must prove this epithet to be wrong and acquire the rightful place in the comity of nations in economic prowess but with benevolence, which we deserve.

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Sunday, August 29, 2010

Company Law - How to register unregistered companies as companies under the Companies Act, 1956

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