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Reg: Suggestionfor Companies Bill 1997 and
Companies(Second Amendment) Bill,1999
Beingactively involved in corporate and secretarial sector, I am keen to give somesuggestions for your kind consideration.
Iam of the firm belief that laws of the land should be as simple as these can be.At the same time these should be aimed at to provide for maximum framework andeverything should be conspicuously clear. Even a man of general integrity shouldbe able to understand the law as it is. The law should provide speedy and quickdisposal.
Iwish to appear personally before committee and to give oral evidence. Pleaseinform me about the time and place for such appearance.
Iwould like to be associated in any process of formation of Company Law and togive constructive suggestions. I am in fairly a good position to seeksuggestions, clarifications and views from the personalities concerned with theCompany Law.
Followingare some of my suggestions:
Companiesshould be required to disclose the amount of listing fees paid stock-exchangewise.
Companiesshould be required to disclose the turnover data stock-exchangewise. This willalso enable the shareholders to instruct the company to get its shares delistedfrom the stock exchanges wherever turnover is very thin.
Detailsof no. of cases filed against the company should required to be given inDirectors’ Report. Further segregated data should be given based on the natureof the case.
Auditors’Comments should be given in bold letters (Font size at least 18) in theirReport. These qualifications should be compulsorily replied by the Directors intheir report to the shareholders. It is observed that some Directors’ Reportsdo not reply Auditors’ qualifications or without proper explanation. TheDirectors’ Report should reply qualifications in bold letters (font size maybe normal) in full details and short-term and long-term implications should bestated in the Directors’ Report itself.
Fulldetails of investments made in subsidiaries / private limited companies /companies in which Directors are interested in any capacity should be given ininvesting company’s Directors’ Report.
Followingdetails should be given:
1.Name of Investee Co.;
2. Investing Co.’s Interest;
3. Amount of Investment;
4. Date of Investment;
5. Return on Investment
6.Compound rate of return.
Atpresent, Companies Act, 1956 permits a time limit of two months for registrationof transfer. After the introduction of depository system, this seems to beexorbitant. This time limit should be reduced to a maximum of two weeks. Furtherif an investor furnishes the proof of having received duly transferred shares ornon-receipt of duly transferred shares beyond the prescribed time limit, suchcompanies should be punished and investors should be entitled for examplerydamages from the company.
Marketlots is 1 share only in respect of the companies whose shares are compulsorilyrequired to be traded in demat mode. Further some companies have reduced facevalue of their shares to less than Rs 10. Both of these factors have led toincrease the folios of such companies. Investors are purchasing even singleshares in these companies. Companies have to send the dividend warrants ofminiscule amounts to such shareholders. This has led to a considerable anddisproportionate burden on companies and load on banking and postal channel. Itis therefore suggested:
a) The investors should have the option to get the dividend warrants thro’their Depository Participant i.e. the company should give the credit to DP andDP should in turn credit the amount to the investor’s a/c with DP. DP canoffset this amount against its other charges receivable from the investor.Companies’ workload of printing and despatching the dividend warrants will belighter, workload on banking channel and postal system will lessen, loss orinterception of dividend warrant in postal transit and banking channel will notbe there and investors’ workload of keeping the track of dividends andpresenting them to bankers for encashments will be negligible. Investorsresiding in small towns will be particularly benefitted as it will save themfrom incurring collection charges.
b) In case the dividend amount is less than say Rs 25, the amount should notbe paid to the investors for the reasons stated above, instead it should betransferred to any fund maintained for the benefit of investors.
c) Interim dividends should not be allowed. It encourages some companies tomanipulate their share prices. Companies at the time of public or rights issuegenerally prefer to declare interim dividends. Secondly, it put undue mailingand other burdens on the company. Moreover, whereas final dividend is a debtagainst the company after the expiry of forty-two days, interim dividend is notso.
d) Dividend warrants should required to be mailed to investors within 7 daysof approval of members at annual general meeting. As dividend warrants arecomputer printed and all the data is updated on computer, there should be nodifficulty to send the warrants within this period.
e) If investor has provided ECS mandate to his DP, dividend amount may becredited directly as per ECS mandate.
Preferenceshares are long viewed as wall-flowers. There should not be any provision forissue of preference shares. Even the preference shares already issued should becompulsorily redeemed within a period of say two years. It is of commonknowledge that promoters generally issue preference shares to themselves to havetheir own money secured and to get good and assured returns. Preference sharesare generally neither issued to general public and nor general public generallyprefers it. No provision for preference shares will also enable us to deletemany sections of the Companies Act.
Similarly,issue of shares at discount should not be allowed. If a company is not in aposition to issue shares even at par, how it is expected to be in a betterposition by issuing shares at discount. Moreover, it will help in reducing thenumber of sections in Companies Act.
Introductionof postal ballot has certain in-built shortcomings. The system does not permitdiscussion or debate, which indeed is sine qua non of democratic society. Further the companies wouldhave to incur hefty expenses on sending registered letters to shareholders.Moreover, what would be the guarantee that the companies would prefer to showthe actual responses of shareholders. They can easily skip some of the responsesand their own response would but naturally permit them to adopt the resolutionthough at expense which would be beneficial to nobody. Postal department isalready finding it difficult to cope with the volume of work it handles.
Thereason often extended for issue of NVS is that most shareholders are onlyinterested in receiving a return on their investment; that they are neitherinterested nor properly equipped to exercise their voting rights. But that viewwas summarily rejected by Justice Jessel; he said “that the rights to vote isan exercise of rights to their property… and I cannot deprive him of hisproperty, although he may not make use of that right of property in a way Imight altogether approve. There is, if I may say so, no obligation on ashareholder of a company to give his vote merely with a view to what otherpersons may consider the interests of the company at large.
Theproposed legislation does not assure regular payment of dividends to thenon-voting shareholders. Further, there is no provision for the accumulation ofdividends if, in any particular year, no dividend is declared by the company.Why in such circumstances a person would be keen to invest in non-voting equitywhen, as an alternative, one could make a deposit with the company and beassured of a regular return. In the case of most companies the return fetched bysuch a deposit would be higher than the dividend they declare. Moreover whilenon-return or delay in deposit invites penal consequences against the companymanagement u/s 58-A of the Companies Act, 1956, there is no such consequence fornon-declaration of dividend. So it makes fear that the proposed amendment mayeven be availed of by errant companies to dilute their legal obligations.
InEngland, there is no bar on issuing non-voting shares, but such a provision wascriticised even in the report of Jenkins Committee (1948) where the minoritytook a view that there should be prohibition on the listing of non-votingshares. Although English stock exchange rules do no ban NVS altogether, they dono encourage listed companies to create NVS either.
Soissue of NVS should not be allowed.
Clause2(60) of the Companies Bill 1997 states : ‘shares with differential rights’means a share that carry with it differential rights as to voting, return ofcapital, or combination or any of them’. This clause permits issue of equitywith full voting power, or with no rights to vote, or with, say, only 10 percent voting rights. However, clause 76 defines ‘equity capital means … allshare capital which is not preference shares.’
Clause98 proposes to discontinue the current system, viz., that a company whichrefuses a registration of share transfer is required to apply to the CLB forconfirmation and leaves the onus on the share transferee to appeal. This changeis against investor interest. Investors generally lack knowledge and resource toapproach judicial authorities. So it is suggested that where there is anyquestion of law, it should be the responsibility of the company to refer thematter to CLB. However, procedural objections like signature difference,incomplete transfer form etc should allowed to be rejected by the company itselfand without referring it to any authority. For example, some time ago, ashareholder Mr Deepakkumar Jayantilal Shah had lodged 5 transfer forms with oneshare certificate. This case involved consideration of fact of law and was notof routine nature.
Sharevalues are no longer restricted merely to the earlier denominations of Rs 10 orRs 100 provided shares of the company are in compulsory demat list. Although itis providing freedom to the companies, at times it creates very anomaloussituations. Zee TV seems sheer cheaper at Rs 500 in comparison to king HindLever at Rs 2500. Companies should allowed to issue only Rs 10 face valueshares.
Atpresent, number of buyers in shares can be a maximum of three. After theintroduction of nomination facility, shares can preferred to be held in the nameof one person. So if the number of buyers are restricted to only one, it will bea great relief for companies because some persons prefer to hold shares in jointnames in different orders to make more persons eligible for attending generalmeetings for gift purposes. Multiplicity of folios makes useless burden oncompanies for sending annual reports, dividend warrants and other communiqués.
Itshould be made obligatory for companies to mention about the status and amountof payment of PF.
Theprocedure for obtaining duplicate share certificates against not tracable / lostshares should be definite one and be prescribed in the Companies Act itself.Further, duplicates in respect of shares of small value say Rs 5000 should beissued after some minimal formalities. Some time ago, I had lodged one equityshares of some company (market price around Rs 50) and the same was got losteither by the company or in transit. The company required me to executeindemnity bond, affidavit and further to send them a demand draft of Rs 500towards advertisement cost.
Itis a much debated question that the companies have to incur a hefty sum onsending annual reports to its shareholders. Companies are treating it asunavoidable evil. The annual report, which is a waste booklet for most of theinvestors, costs companies even in crores. Let aside monetary value, it has agreat grand negative effect on our already degraded and degrading environment. Iam very much concerned and interested to reduce this wasteful expense to thecompany, save the environment and at the same time, to offer full opportunity tohave complete information and annual report to interested shareholders. It issuggested:
Acolumn should be inserted in transfer deed in lower buyer’s portion, inaccount opening form with DP, in application forms in case of public issues, inrenouncee’s portion in case of rights issue requiring the option to be filledin by the investors as to whether the investor is interested in having copies ofannual report. Further, by adopting this mechanism, since copies of annualreport would be sent only to interested persons, abridged annual reports shouldnot be permitted.
Themost common problem being faced by the transferors is objection of signaturediffer. Various measures have been taken up by many authorities to solve thisinsurmountable problem. Yet it could not be fully solved. So some definitemeasure should be specified in the Companies Act. The measure may be:
a) Purchase and execution of an affidavit declaring the sale of shares inquestion by transferor. Affidavit should be purchased by seller from his owncity and to be attested also from same city where he resides.
b) Thereafter registered notice should be given to transferor by company.
Theamount of listing fees paid stock exchangewise should required to be mentionedin Directors’ Report.
Everyshareholder is not in a position to attend the AGM personally due togeographical widespread and paucity of time and resources. Further AGM is aone-time-affair-in-a-year. If a shareholder is desirous of obtaining someadditional information from the company by correspondence, it has been noticedthat most of the companies refuse to provide the required information to theshareholders saying that there is no specific provision in the Companies Actwhich forces companies to provide such information. So suitable amendment inCompanies Act is requested.
Ithas been noticed that minutes of general meetings contain only the resolution,name of the proposer and seconded by. The deliberations and debates carried onin the meetings are conveniently skipped from the minutes. This is not a healthypractice. Companies should required to give all the factual information aboutthe conduct of the meeting and not merely text of resolutions and yes, no withregard thereto. Further if any shareholder wishes to get his dissent recorded,it should be. Specific amendments in Companies Act are required.
Unclaimeddividend warrants are required to be transferred to Investor Education andProtection Fund after the expiry of 7 years from the date of declaration. Thisperiod of 7 years should be reduced to 1 year. Before transfer, it should bemade obligatory for the companies to send individual information to suchshareholders advising them to claim the dividend amount before the transfer.
Thereshould be no provision for conversion of shares into stock and vice-versa. Theseprovisions are useless and are useful only for academic exams.
Allowingcompanies to buy-back their own shares certainly offers tremendous opportunityto companies to manipulate their share prices. Some time ago, Atlas CycleIndustries Ltd was very quick to announce its decision to buy its shares back @Rs 300 per share. Market price at the time of announcement was around Rs 60.Thereafter, the share price had regular kiss with upper circuit breaker for manydays consecutively. Now again the vibrations in shares price of Atlas havesettled and price again has settled at Rs 60 after touching a high of Rs 200.Who have benefitted? Not the shareholders who have to tender the shares forbuy-back, but the operators only. Buy-back is a great mistake allowed by CompanyLaw. Companies are increasing their equity by issuing bonus and / or rightsshares and we are talking of buy-back. Who is interested in these petty matters.Apparently nobody.
Theshareholders should have the opportunity to receive copy of Memorandum andArticles of Association of the company at the earlier price i.e. Re 1 u/s 39 ofthe Companies Act, 1956. This price is nothing if we consider the costs to thecompany. However, it is not demanded by every shareholder. Average is less thaneven one share per company per year.
Thecharges for obtaining extracts of various types of registers have been fixed atRe 1 for every hundred typed words. Now data is not typed on manual typewriters.Either computer print-outs or photocopies are provided. So the charges should belinked not to the number of words but to the quantity such as at the rate of Re1 for every printed / xeroxed page.
Theprocedure for approaching CLB or any other concerned authority should be simpleand personal attendance of aggrieved or opposite party should not be compulsory.Parties should be free to lodge their written statements by post. Aggrievedparty should be allowed to file complaint with charges of say, Rs 1000. In casethe aggrieved party is able to establish his claim, the charges paid by itshould be reimbursed by the opposite party. In case the aggrieved party fails toprove its claim, the charges should be forfeited.
Tothese suggestions, I expecting your immediate response by registered post /courier.
Mr Vinod Bansal
Kinetic Trust ltd
1406, Vikram Towers
16, Rajendra Place
NEW DELHI- 110 008
011 - 5730009, 5783224
Fax # 5750460
Dear Mr Bansal,
I am in receipt of a copy of annual report of the Company. I am giving herein below some of my observations:
VENUE OF THE MEETING
Last year, AGM was held at Hotel Cheveron, Ludhiana. This year, the AGM is going to be held at some D - 85, Phase VI, Focal Point, Ludhiana, which if I am not wrong, is the Registered Office of M/s D.D. Steel Castings Ltd.
I had the privilege of meeting with your goodself at Delhi last year. You have told that money of shareholders is Holy-Money for the Management and all your efforts are towards service and profit-maximisation for shareholders. If that is so, why you have chosen “Focal Point” for AGM. There is no doubt that the Company will be making a saving of few hundred or thousand rupees by holding AGM at such a distant and industrial place, but you will kindly agree that the Company will be losing the faith and confidence of shareholders in this way, who, I agree, are very meager in number.
2nd and 3rd items of agenda for AGM read as under :
2. To appoint Mr Rajesh Arora who.....................
3. To appoint Mr Deepak Gupta who...................
From the notice, it is very difficult to ascertain that for which office and designation, Mr Rajesh Arora and Mr Deepak Gupta are to be appointed. So these two items are very vague and imprecise in nature. Though these cannot be treated as unlawful, these can safely be assumed of no value and significance.
Further, as you are well aware that as per provisions of Section 256 (3), a Company may fill up the vacancy of a director by appointing the retiring director or some other person in place thereto. This is the reason that resolutions for reappointment are drafted in following way :
“To appoint a Director in place of Mr............., who retires by rotation and being eligible, offers himself for reappointment.”
For the aforesaid two reasons, it can be treated that there is no specific item for appointment of directors in place of those who are retiring by rotation.
Will you kindly issue fresh notice to the members carrying abovenoted amendments?
CLOSURE OF REGISTER OF MEMBERS
The Register of Members is to be closed between 19th and 22nd September 1997, whereas the AGM is to be held at 25th September 1997.
As you know, every Company closes its Register of Members starting on any date but ending with the date of AGM, though I agree it is not statutorily required. Then why the Company has closed the Register between other dates ?
Further one more question arises as to who will entitled to attend the AGM if the shares are sold and subsequently lodged for transfer on 23rd September 1997. It can be said that its Register of Members as on 25th September 1997 is to be ascertained for this purpose. As you know that in such a case, entitlement to attend the AGM will depend upon the Company as whether it register transfer of shares before that date or not.
The Directors’ Report is addressed to M/s Kinetic Trust Ltd and it starts with “Dear Shareholders”. Kinetic Trust Ltd is not a shareholder of the Directors. The report should be addressed to the shareholders.
Financial Results as reported in Directors’ Report are as follows :
(Rs. in Lacs)
Profit before depreciation
Less : Depreciation
Net Profit tfd. to B/Sheet
As per above figures, Profit Before Depreciation is Rs 7.67 lacs and Depreciation amount is Rs 6.16 lacs. If we deduct Rs 6.16 from Rs 7.67 lacs, the figure will be Rs 1.51 lacs. However, the Directors’ have chosen to show Net Profit as Rs 5.89 lacs in their Report.
PERFORMANCE OF COMPANY
Increase in turnover from Rs 1148 to Rs 1324 lacs have been stated as “Your Company has continued with the trend of growth”.
The Company is not engaged in any production activities. So increase in turnover cannot be termed as ‘Growth’. Further as you know, Stock-in-trade as on 31.03.97 is nil as against RS 34.23 lacs at the commencement of the year.
PARTICULARS OF EMPLOYEES U/S 217 (2a)
There is no heading to the information provided regarding Particulars of Employees u/s 217 (2a).
APPROPRIATIONS- PROPOSED DIVIDEND
Proposed dividend for both the years i.e. for 1995 - 96 and for 1996 - 97 is given as nil. However, there is an entry for Rs 7,18,815 towards Dividend Paid (F/Y 1995 - 96).
DCA Circular : A company is statutorily required to provide for proposed dividend in its profit and loss accounts to show the same under the head “Current Liabilities and Provisions” in the Balance Sheet. Failure to make such provision in the accounts amounts to contravention of scheduleVI read with Section 211. It is also the duty of the auditors to bring outclearly in their report (Circular NO. 3/124/75-CL-V, dated 22.11.1976)
ICAI Guidelines : Where the provision for proposed dividend has not been made, the fact should be disclosed by way of note in the accounts and the auditor should make a suitable qualification in this regard. (ICAI Guidance Note on Provision for Proposed Dividend).
Auditors’ Failure : As you know that besides the Board, Auditors, M/s Kathpalia & Associates, too failed to point out this deficiency.
These queries are required to be replied within aperiod of 7 days from the receipt of this communiqué.