A half-baked, hurried piece of legislation

THE COMPANIES (Second Amendment) Bill, 1999 (the Bill) was introduced in the Lok Sabha on November 23, 1999. What with time is lost in continuous furore over populist and non-productive issues, the bill could not be taken for discussion in the Budget session as earlier expected.

The government has now indicated that the bill is before a Joint Parliamentary Committee and would definitely get it enacted in the ensuing monsoon session.

The avowed reasoning behind the Bill is ``to provide immediately certain measures of good corporate governance and for protection of investors" through 22 measures detailed in its Statement of Objects and Reasons. This statement concludes with the Government's expectations that ``the amendments in a short Bill will ensure better corporate governance, transparency in working of companies and also more effective enforcement by enhancing the penalty/ punishment for contravention so as to ensure better compliance of the provisions of the principal Act".

The statement also refers to the likely delay in the process of examination by the Standing Committee of Parliament in the `comprehensive' Companies Bill, 1997, introduced in the Rajya Sabha, way back in August 1997.

The Bill consists of 224 Clauses - of them 110 relate to enhancing the existing penalties for violation of its various provisions. This is as it should be, what with inflation and rising costs of administering the Act.

However, the Government has been quietly and periodically enhancing the fees for filing returns, and applications, as this does not require amendment to the Act.

Further many Clauses are devoted solely to delete the expression `managing agents, secretaries and treasurers', wherever they appear in the principal Act, which is `of a consequential nature', following the abolition of these systems way back in 1970.

It is a mystery why this cleansing operation was not carried out simultaneously with the abolition of these anachronisms. As such, less than 25 per cent of the total Clauses of the Bill are of a substantive nature or of any import.

The Bill has, seemingly, been drafted in a hurry. This casual approach has resulted in the inclusion of ambiguous or invidious wording which could do with corrections at this stage itself. Given below are a few of such examples, just illustrative and not exhaustive.

(1) Clause 7 of the Bill, intending to insert a new Section 17A in the principal Act, is a serious offender and reads as: ``No company shall change the place of its registered office from one place to another within a State unless it is confirmed by the Regional Director". This Clause, if it becomes law with the present wording, would result in Regional Directors being flooded with hundreds of applications, as even shifting the registered office from Adyar to Egmore would come within its ambit.

However, the Government's intention is to involve Regional Directors only when the change is from the jurisdiction of one Registrar of Companies (ROC) to another Registrar of Companies within the same State, for example, ROCs in Chennai and Coimbatore within the State of Tamil Nadu (as mentioned in the Statement of Objects and Reasons and also the heading of the very Clause itself reading as `change of registered office within a State'). The Government's intentions are not reflected in the Clause as presently drafted.

(2) Another glaring example is Clause 19 of the Bill proposing to introduce two new Sections, 58AA and 58AAA, in the principal Act relating to acceptance of deposits from the public. One of the subclauses proposed is an instance of allowing Peter to rob to pay Paul.

It reads as: ``where a company had accepted deposits from small depositors and subsequent to such acceptance of deposits, obtains funds by taking a loan for the purposes of its working capital from any bank, it shall first utilise the funds so obtained for the repayment of any deposit or any part thereof or any interest thereupon to the small depositor before applying such funds for any other purpose''.

When banks are even now burdened with huge amounts of non- performing assets (NPAs), is it not a thoughtless provision? Bankers, better beware! According to the new Clause, ``a small depositor means a depositor who has invested in a financial year a sum not exceeding Rs. 20,000 in a company''.

(3) The term `listed public companies' is used in many places in the Bill. When only public companies are eligible for enlistment in stock exchanges and such companies are usually referred to as only `listed companies', is it necessary to add the word `public' before `listed companies'?

(4) In terms of Section 39 of the principal Act, a company can charge its members only a paltry Re. 1 for furnishing a copy of its memorandum and articles of association.

When penalties by way of fines are proposed to be enhanced and in some cases enhanced substantially, and when paper and printing costs have skyrocketed, should not this `pittance' one rupee be also increased or left to the discretion of individual companies.

(5) We have now in India an archaic system of what is called `deemed public companies or Section 43A companies'. The Bill rightly proposes to abolish this anachronism but the opportunity to delete this term from Sec. 252 of the principal Act has not been utilised, although Sec. 252 is also being amended for other reasons.

In this and the following parts, the Bill will be critically examined, not necessarily in the order they appear therein.

Dividends: We will first take up the new provision relating to dividends, as the return to shareholders is one of the sine qua nons of good management. There is no question that the Government is to be applauded for reducing the period for paying out dividend/ interim dividend to shareholders from the current 42 days to 30 days.

The Bill has also another Clause stating that `dividend includes any interrim dividend'. However, it does not spell out how the 30 day period is to be calculated in respect of interim dividend.

The present law and practice, as far as final dividend is concerned, is the period is reckoned from the day the members `declare' the dividend at annual general meetings, as recommended by the board.

In the case of interim dividend, there is no such declaration. The new Bill is silent on this aspect. Table A of the principal Act, which is model regulations for management of companies limited by shares, stipulates ``the board may, from time to time, pay to the members such interim dividends as appear to it to be justified by the profits of the company''. This, in essence, means and is the practice also, that members' approval is not necessary for paying out interim dividends.

And surprisingly, there is no bar for boards to cancel the decision at any time till the amounts are paid out. Further law does not state in so many words how the period is to be calculated.

With the Bill laying down that ``dividend includes interim dividend also", does it not enjoin on companies to obtain shareholders' approval before interim dividend can be paid out?

The board cannot, on its own, pay out any interim dividend in the context of interim dividend being linked with final dividend. It can only recommend but the final approval has to be by the members.

Another interesting point is whether interim dividend can be paid at all, since declaring a dividend is, by lay, the prerogative of annual general meetings! Careless drafting-a simple matter made worse confounded!

Finally, it may be interesting to probe whether the 30 day limit for dividend payment is compatible with the 42 day notice requirement of stock exchanges for fixing record date/ book closing.

S. Balakrishnan

(To be continued)