Mallar Law Consulting www.mallarlaw.

com

Ram Mallar
Prof. of Law & Corporate Governance

Welingkar Institute of Management, Development & Research

PRIVATE & CONFIDENTIAL

HANDOUT

BUSINESS LAW

CONFIDENTIALITY NOTICE
This Hand-Out is intended solely for the management students of Professor Ram Mallar. Access to this document by anyone else is unauthorized. If you are not the student, any disclosure, copying, distribution or any action taken or omitted to be taken in reliance on it, is prohibited and may be unlawful. Any opinions or advice contained in this document are subject to the standard terms and conditions of confidentiality.

2008 Mallar Law Consulting 3, Silver Cascade, 110AA, Near Ruby Mills, Senapati Bapat Marg, Dadar West. Mumbai 400 028. Tel. No.: 2432 2713 (4 lines) Email: mallarlaw@vsnl.net - Website: www.mallarlaw.com

111

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

IMPORTANT AMENDMENTS MADE BY THE COMPANIES (AMENDMENT) ACT, 2000. (came into force on December 13, 2000) Abbreviations : The Companies Act, 1956 (the Act) The Companies (Amendment) Act, 2000(the Amendment Act) The Registrar of Companies (ROC) 1. Definitions of Private/Public Company (Section 3) Definitions of both Private and Public Companies have been amended. Private Company - Section 3(i)(iii): Additional Private Company are as under: (i) (ii) conditions added to the definition of a

a private company must have a minimum paid up capital of Rs. 1 lakh; a private company must by its Articles of Association, prohibit any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

All private companies within a period of two years from December 13, 2000 must increase the paid up capital to Rs. 1 lakh. By an amendment made to Section 3, if such company fails to increase the capital, it shall be deemed to be a defunct company under Section 560 and its name will be struck off from the Register by ROC. Public Company - Section 3(i)(iv): Additional conditions added to the definition of Public Company are as under: (i) (ii) has a minimum paid up capital of Rs. 5 lakhs; is a private company which is a subsidiary of company which is not a private company.

All public companies with a paid up capital of less than Rs. 5 lakhs is required to increase the capital within a period of two years from December 13, 2000. If it fails to do so, it shall be deemed to be a defunct company under Section 560, and its name will be struck off from the Register by ROC. Does a private company, which is a subsidiary of a company, which is not a private company, require to take any steps upon becoming a public company? It is not clear whether such company is required to amend its Articles of Association to provide: (i) minimum shareholders of seven; (ii) minimum number of Directors of three; (iii) delete basic features of private companies. In the absence of specific provisions in the Amendment Act, such private companies can continue to have the basic features of a private company, but they will be treated as normal public limited companies. The requirement of minimum paid up capital is not applicable to companies under Section 25 of the Act.

211

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

2. Deemed Public Companies (Section 43A): The Amendment Act made Section 43A inoperative. It means from December 13, 2000, all Deemed Public Companies will be reverted to their original status of being a private company. Such company will have to inform the ROC that it has become a private company. The ROC will add the word Private to the name of the company by making a necessary change in the Certificate of Incorporation and also approve the Memorandum of Association within 4 weeks from the date of application. 3. Types of Capital (Section 86): A new variation to the equity share capital has been introduced. Share capital of a limited liability company shall be of following kinds: (a) equity share capital: (i) with voting rights or; (ii) with differential rights as to dividend, voting or otherwise in accordance with rules to be framed by the Government; (b) preference share capital. The objective of this provision is to enable the promoters to raise capital for the companies without drastically reducing their control through voting rights while at the same time the investors are not denied their benefits of dividend, bonus shares etc. 4. Passing of resolution by Postal Ballot (Section 192A): A new Section has been introduced which will be applicable to listed public companies. The provisions for postal ballot are: (i) applicable only to listed public company; (ii) postal ballot is to be taken in respect of such business as may be notified by the Central Government or; (iii) such other businesses as the company may decide on its own; (iv) businesses transacted by postal ballot will not go before the shareholders in general meetings; (v) the method of sending notice, document to be annexed are dealt with under Section 192A. 5. Report of the Board of Directors (Section 217): The Boards Report must include Directors Responsibility Statement as under: (i) that in the preparation of annual accounts, the applicable accounting standards have been followed along with proper explanation for material departures; (ii) that the Directors have selected such accounting policies and applied them consistently and made judgements 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 & Loss of the company for that period; (iii) that the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

311

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

(iv) that the Directors have prepared the annual accounts on a going concern basis. 6. Appointment of Auditors (Section 224): Currently, for calculating the limit on number of companies to be audited by an auditor includes a private company. Hereafter, private companies have been deleted for calculating the limit. Sub-section 3 of Section 226 specifies the disqualification for appointment of an auditor of the company. The Amendment Act adds one more disqualification. A person holding security, i.e., an instrument which carries voting rights of that company, shall not be eligible to be appointed as an auditor. Those who are currently holding such security are required to sell it within a period of one year from December 13, 2000. The above disqualification also applies to cost auditors. 7. Minimum number of Directors (Section 252): A public company having a paid up capital of Rs. 5 crores or more and one thousand or more shareholders may have at least one director elected by the small shareholders in the manner to be prescribed. The small shareholder means a person holding shares of nominal value of Rs. 20,000/- or less in a public company. It may be noted that this is not a mandatory requirement as the word used is may and not shall. 8. Disqualification of Directors (Section 274): Section 274 gives the circumstances in which a person cannot be appointed as a director of the company. One more disqualification has been added. A person cannot now be appointed as a director if he is a director of the public company: (i) which has not filed Annual Accounts and Annual Returns for continuous three financial years commencing after April 1, 1999, or; (ii) which has failed to repay its deposits or interests or redeem its debentures on due date or pay dividend and such failure continues for one year or more. Such director cannot be eligible to be appointed as a director of any public company for a period of five years from the date on which the public company has committed the aforesaid defaults. It means every public company before appointment of any new director must obtain a declaration from him that he complies with the new disqualification under Section 274.

9. Reduction in maximum number of Directorship (Section 275): Until now the maximum number of directorship is twenty, which has been reduced to fifteen. Affected directors should exercise their choice within two months from December 13, 2000. 10. Audit Committee (Section 292A):

411

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

For improving corporate governance, the system of audit committee has been introduced. Summary of the provisions for audit committee is as under: (i) it applies to a public company having a paid up capital of not less than Rs. 5 crores; (ii) the audit committee must consist of not less than three directors. Two third must be directors other than Managing or Whole-time Directors; (iii) the committee shall act according to the terms of reference specified by the Board in writing; (iv) the chairman of the committee will be elected by the members of the committee; (v) the Annual Report must disclose the composition of the committee; (vi) a committee will have authority to investigate into any matter or such matter referred to it by the Board and will have full access to the records of the company; (vii) the committee must have the discussion with the auditors periodically about the internal control systems, the scope of audit including the observations of the auditors and review the half yearly and annual financial statements before submission to the Board; (viii) the auditors, internal auditor if any, the director-in-charge of finance must attend the meetings of audit committee but will not have any voting right; (ix) the recommendation of the audit committee is binding on the Board. If the Board does not accept the recommendation, it must record the reasons and communicate the same to the shareholders; (x) the chairman of the audit committee must attend the Annual General Meeting to provide any clarification related to the audit.

11. Compliance Certificate (Section 383A):

Section 383A has been amended. Currently under this Section, a company having a paid up capital of more than Rs. 50 lakhs, is required to appoint a whole-time company secretary. Now under the Amendment Act, a company having a paid up share capital of more than Rs. 10 lakhs but less than Rs. 50 lakhs is required to obtain a certificate from a Company Secretary in whole-time practice in a form prescribed under the Rules. The compliance certificate: (i) is for each financial year; (ii) shall be filed with ROC within 30 days from AGM; (iii) shall be placed before the AGM, and (iv) shall be attached to the Report of Board of Directors. The compliance certificate may be required even for the financial year, which is just over, provided the Board of Directors Report has not been signed before February 1, 2001. 12. Interim Dividend [Section 2(14A) & Section 205]:

Under Section 2 (14A) the dividend now has been defined to include any interim dividend. Section 205 also has been amended. As a result interim dividend will attract provisions of Sections 205, 205A, 205C, 206, 206A and 207. Summary of the effect of the amendments is as under: (i) the period for payment of dividend from the date of declaration has been reduced from 42 days to 30 days; (ii) the period of 30 days for payment of interim dividend is to be calculated from the date of Board Meeting; (iii) the company must deposit interim dividend in a separate Bank Account titled as Interim Dividend Account within 5 days from the date of declaration by the Board of Directors.

511

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

It means since interim dividend is now treated as dividend, the company should provide for depreciation as required by Section 205 and comply with Companies (Transfer of Profits to Reserves) Rules 1975. There is no change in the period of 7 days by which the unclaimed dividend (whether final or interim) is required to be transferred to a special Unpaid Dividend Account. But such transfer should be after expiry of 30 days from the date of declaration and not 42 days.

13. Change of Registered Office within a State (Section 17A):

Until now shifting of a Registered Office within a State did not require the approval of Regional Director. Under the Amendment Act such shifting require the approval of the Regional Director, if such shifting is from the jurisdiction of one ROC to jurisdiction of another ROC within the same State (this applies only to States where there are more than one ROCs, like Maharashtra & Tamilnadu).

14. Powers of Securities and Exchange Board of India (Section 55A):

A new Section 55A has been introduced. Hereafter the provisions contained in Sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207, so far as they relate to issue and transfer of securities and non-payment of dividend, will be administered by SEBI, provided the company concerned is a listed public company. Or the public company intends to list its securities. In all other cases, these provisions will continue to be administered by Central Government. It has also been clarified that all powers relating to matters of prospectus/statement-in-lieu of prospectus, return of allotment, issue of shares and redemption of irredeemable preference shares will be exercised by the Central Government, Company Law Board, ROC as the case may be. 15. Small Depositors (Sections 58AA & 58AAA): Two new Sections namely, Section 58AA & 58AAA have been introduced for protecting the small depositors. A small depositor is one who has deposited in any financial year a deposit of Rs. 20,000/-. Every company which fails to repay such deposits, should on its own intimate Company Law Board within 60 days from the date of default. It should also furnish full particulars of principal sums of deposits and interest thereon due to small depositors. Intimation should be given on monthly basis. The Company Law Board is required to pass an appropriate order within 30 days. No company should accept further deposits from small depositors unless it discharges earlier deposits together with interest. It should also state the details of the default in all future advertisement for deposits. If a company accepts deposits from small depositors and thereafter it obtains funds for working capital from any Bank, it shall first utilise the funds so obtained for repayment of deposits before applying such funds for other purposes. Every offence connected with acceptance of deposits from small depositors has been made cognizible offence. However no Court shall take cognizance of such offence except on a complaint made by the Central Government. Incidentally, this offence is a non-bailable offence under CPC. It also means, if a complaint is given by the Central Government, the

611

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

Inspector of Police can arrest the Director of the company without warrant. It also means that the offence under Section 58AA is also not a compoundable offence under Section 621A of the Act. 16. Shelf Prospectus (Section 60A):

The new Section 60A relates to Shelf Prospectus. Shelf Prospectus means a prospectus issued by any financial institution or Bank for one or more issues of securities or class of securities specified in that prospectus. A company filing a Shelf Prospectus with ROC will not be required to file new prospectus at every stage of offer of securities within the period of validity of such Shelf Prospectus. Such company filing a Shelf Prospectus is required to file an information memorandum on all material facts relating to new charges created, changes in the financial position between the different offering of securities within the stipulated time, prior to making subsequent offer of securities under the Shelf Prospectus. Shelf Prospectus is valid for a period of one year from the date of opening of first issue of securities under the Shelf Prospectus. The information memorandum is required to be circulated to the public along with Shelf Prospectus at every offering of securities. 17. Information Memorandum (Section 60B):

A new provision has been introduced for Information Memorandum. Information Memorandum means a process undertaken prior to the filing of prospectus by which a demand for the securities proposed to be issued by the company is elicited and the price and terms of issue for such securities is assessed by means of a notice, circular, advertisement or other document. Any public company making an issue of securities may circulate Information Memorandum to the public prior to filing a prospectus. A company inviting subscription by an Information Memorandum is bound to file a prospectus prior to the opening the subscription list and the offer as a red-herring prospectus at least three days before opening the offer. The Information Memorandum and red-herring prospectus shall carry same obligations as are applicable to the prospectus. Upon closing the offer of securities, a final prospectus stating therein the total capital raised and the closing price of the securities and any other details not complete in the red-herring prospectus is required to be filed with SEBI in the case of listed public company and with ROC in the case of other public companies.

18. Offering of Shares to more than 50 persons (Section 67):

Currently raising capital from Directors relatives and friends is treated as private offer. Now Section 67 has been amended to provide that offer or invitation to subscribe shares or debentures to 50 persons or more will be treated as a public offer. Accordingly provisions for Prospectus will apply. However, this will not apply to non-banking financial companies or public financial institutions. 19. Initial offer of Rs. 10 crores or more in Demat form (Section 68B):

711

Mallar Law Consulting www.mallarlaw.com

Ram Mallar
Prof. of Law & Corporate Governance

This is a new Section. Every listed public company making initial public offer of any security for Rs. 10 crores or more must issue the same only in dematerialised form by complying with the provisions of the Depositories Act, 1992. 20. Debenture issue (Sections 117A, 117B and 117C):

Sections 117A to 117C have been introduced to strengthen the appointment of debenture trustees and duties of debenture trustees and liability of the company to create security and Debenture Redemption Reserve. The Trust Deed for securing debentures will have to be in the prescribed form to be executed within the prescribed time. No company can issue Prospectus for debentures before appointing debenture trustees and such appointment is shown in the prospectus and the consent of the trustees also obtained. If the debenture trustees comes to a conclusion that the assets of the company are insufficient to discharge the liabilities of the debenture holders, the trustees can file a petition before the Company Law Board for passing necessary orders before incurring further liabilities by the company. The company is also liable to create Debenture Redemption Reserve out of the profits of the company.

21. Public Trustee (Sections 153A, 153B, 187B & 187C):

The office of Public Trustee is abolished and therefore, Sections 153A, 153B, 187B & 187C will be inoperative from December 13, 2000. Consequently, Trust can directly exercise voting rights in a company. Also, registered shareholders who have no beneficial interest in the shares are not liable to make any declaration under Section 187C of the Act.

22. Inspection of Books of Accounts (Section 209A):

Section 209A gives power to the Central Government for inspection of Books of Accounts. Now, SEBI has also been empowered to carry out such inspection of listed public companies. However, this is restricted to matters delegated to SEBI under Section 55A. 23. Ascertainment of Depreciation (Section 350): Currently for the purpose of calculating managerial remuneration, net profit is required to be worked out under Sections 349 & 350. Accordingly, depreciation is required to be calculated with reference to written-down value and not straight-line method. Now under the amendment, for computing the net profit for managerial remuneration, depreciation will be the same as provided in the books of accounts. 24. Offer of Indian Depository Receipts (Section 605A): A new Section has been added by which foreign companies (companies incorporated outside India) will be permitted to issue in India, Indian Depository Receipts. The necessary Rules will be framed by the Central Government for this purpose.

811