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Companies Amendment Bill, 1999 -- Plug the loopholes

R. Ravi

THE system of notifying the Registrar of Companies of a director's resignation is inadequate: The intimation on his own resignation by the director concerned, is not accepted by the office. The prescribed Form 32, signed by another director or secretary alone is recognised by the Registrar. As a result, even after having resigned from the board, the director would continue to be treated as such by the authorities until the company chooses to file the form at its convenience. If, in the meantime, action is taken by a payee (under the Negotiable Instruments Act) or by a depositor or the DCA under the proposed Section 58AA, the plight of the director can be imagined.

Suitable amendments should be made in the Act and rules such that the intimation of the resignation by the director, sent by registered post, should be taken on record by the Registrar.

Reservation for small shareholders

Another serious lacuna in the Bill is the introduction of the concept of `small shareholders' in Section 252 and the mandatory requirement for public companies having a paid up capital of Rs. 5 crores or above and one thousand or more shareholders holdin g shares of nominal value of Rs. 20,000 or less (small shareholders) to have at least one director elected by such shareholders in the manner to be prescribed in the Act.

The logic for the creation of a class of shareholders is not understood at all. Even the provisions of Sections 397/398 which deal with oppression and mismanagement, which permit collective action by a minority of shareholders requires a minimum sharehol ding of a tenth of the paid up capital. The provision under Section 179 on rights of shareholders to demand a poll requires a minimum shareholding of Rs. 50,000 of nominal value, (either by himself or the aggregate holding of all such shareholders demand ing a poll). The practical difficulties in complying with or the enforcement of the provisions should be considered by the Government in devising the procedures and rules under this section.

The holding of nominal value of shares of Rs. 20,000 or less may not be an equitable measure for different classes of companies, having different market value for their shares. The depository mode of shareholding permits acquiring even one share, without any hassles, with the result that new economy shares, whose market value is 150-1,000 times their nominal value, investors who may not have resources to buy such shares in market lot of 50-100, resort to purchase of even one share.

Again, an investor is free to open his account with any number of depository participants for his shareholding in a company; thus, the number of shareholders gets multiplied although this shareholding relate to the same person. It is difficult to trace t he details of persons with same name, but having shareholding with different DPs. This artificially increases the number of shareholders, thus bringing the companies under the purview of this Section.

Again, if the government sees any merit in these provisions, may not be achieved, when the size of the company and the shareholding population are different. Consider a company with Rs. 500 crores paid up capital and 10 lakh shareholders of which 8 lakh are small shareholders and another company of Rs. 50 crores paid-up capital, 1 lakh shareholders of which 60,000 are small shareholders and a third company with Rs. 5 crores paid up capital, 5,000 shareholders of which 4,500 are small shareholders.

It is quite clear that these companies are not comparable and, yet, the requirement is that each such company will necessarily have at least one director appointed by the small shareholders.

The reckoning date for the determination of holding of a shareholder to be classified as a small shareholder becomes a contentious issue between the company and the shareholders. Is it the book closure date or the date of posting the notice convening th e meeting or the date of the annual general meeting that is relevant? For, in effect, the shareholding may change on these three different dates and a person may not hold any shares as of the date of the meeting.

Can small shareholders elect a person holding shares in excess of the limit of Rs. 20,000 or a person who does not hold any shares but is related to or associated with the members of the board? When the provisions state that a company shall have one dire ctor elected by small shareholders, what happens if the resolution is defeated at the meeting?

The Government should give serious consideration to these aspects before the provisions are made effective. While innovative, investor-friendly measures need to be introduced, it should be ensured that such provisions are meaningful and really deliver th e desired results.

(Concluded)

(The author is Secretary, Rane Group, Chennai. The views expressed are personal.)