The Hindu Business Line : Time to pool authority

In the Companies (Amendment) Act, 2000, which came into force from December 13, 2000, two new Sections 58AA and 58AAA have been inserted to protect small depositors. A small depositor is one who has deposited in a financial year a sum not exceeding Rs 20,000 in a company and includes his successors, nominees and legal representatives but not those depositors who renewed their deposits and those depositors whose repayment is not made due to death or stay order of a competent court or authority.

Any company accepting deposits shall have to inform the Company Law Board (CLB), on a monthly basis, the names and addresses of each small depositor about its default in repayment of depositor payment of interest thereon. A 60-day period is the maximum allowed for information of any default to the CLB which shall, after giving such depositor an opportunity of being heard, pass an appropriate order within 30 days from the date of receipt of such intimation from the defaulting company. Such defaulting company is prohibited to accept further deposits from small depositors at any time until the defaults are made good.

Second, the total number of small depositors and amount due to them in respect of which default is made and the facts of waiver of interest accrued on deposits shall be stated in all future advertisements and application forms inviting deposits from the public and every application form of accepting deposits shall contain a statement the applicant has been apprised of every past default of the company in repayment of deposits and/or interest thereon to small depositors.

Third, every director of such defaulter company shall be prohibited to be appointed as a director of any public company for five years from the date such default committed.

Fourth, no such company shall directly or indirectly make any loan to any body corporate, give guarantee or provide security or acquire securities of any body corporate till such default is subsisting.

Fifth, every non-compliance is punishable with imprisonment up to three years and also fine not less than Rs 500 for every day till default continues. This offence is not compoundable but a cognisable offence.

Sixth, an aggrieved depositor is also entitled to make application to the CLB for redressal of his grievance against the company under sub-section (9) of Section 58A of the Act for repayment of the deposits duly due as per the terms and conditions thereof.

The Companies (Second Amendment) Act, 2002, which received consent of the President on January 13, 2003, has provided dissolution of the CLB under Section 10FA of the Act and the CLB has been replaced by the National Company Law Tribunal (NCLT).

Any person aggrieved by an order or decision of the NCLT may prefer an appeal to the Appellate Tribunal (AT), and any person aggrieved by any decision or order of the AT may file an appeal to the Supreme Court. Consequently, the changes have been made in the provisions of Sections 58A and 58AA of the Act relating to corporate depositors, whether small or not.

Exemption to NBFCs not holding or accepting public deposits: The Reserve Bank of India, vide its Notification No. 164/CGM/CSM of January 8, 2003, has exempted amongst others, any non-banking financial company not holding or accepting public deposit as defined in paragraph 2(1) (xii) of the Notification No. DFC.118/DG (SPT)-98 of January 31, 1998, from the provisions of Section 45-1A (requirement of registration and net owned fund); Section 45-1B (maintenance of certain percentage of assets); Section 45-1C (creation of reserve fund from net profit); Section 45MB (power of the RBI to prohibit acceptance of public deposits and alienation of assets); Section 45MC (power of the RBI to file winding up petition) and also from the compliance of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998.

Requisite changes in the Bill

Definition of deposit: "Amounts raised by way of share capital" need to be amended by inserting "duly allotted within 30 days form the date of receipt". In the Companies Act, 1956 there is no provision for allotment of share capital on receipt of share application money, which remains as such for an indefinite period in the books of the company. As such, it is suggested to put in order the funds management.

Net owned funds: Here, it is essential to mention specifically the reserves which shall constitute "free reserves", as it is differently specified in other statutes and rules.

The term "same group" needs to be defined, as Section 370 of the Act has become inoperative w.e.f. October 31, 1998.

Public deposits: As the definitions of `company' in Section 3 of the Act has been changed w.e.f. December 13, 2000, private companies are prohibited to invite or accept deposits from persons other than directors, members and their relatives. And, in view of the change made to Rule 2(6) (ix) of the Companies (Acceptance of Deposits) Rules, 1975 w.e.f. January 25, 2001, in consultation with the RBI, the sub-clause "(i) any amount received from a relative of a director of the financial company" needs to be deleted.

Section 6 (registration of financial companies) and Section 7 (requirement of net owned fund) need to be amended suitably as to exempt financial companies not holding, inviting, accepting or renewing public deposits and also chits and nidhi companies.

Section 9: The provision for minimum transfer of 20 per cent of net profit to reserve before declaring dividend is harsh for investors and also contrary to the provisions of the Compulsory Transfer of Profit Rules, 1975 which provides for transfer of 2.5 per cent of net profit if a dividend of more than 10 per cent is declared.

Hence, minimum dividend at the rate of 10 per cent should be allowed without compulsory transfer out of net profits to reserves.

Section 37: Private companies should also be added to this section, prohibiting them from accepting public deposits.

Redressal of depositors' grievances: In view of the dissolution of the CLB, Sections 23 to 35 must be examined along with Sections 58A(9) and 58AA of the Act and, then, an uniform redressal procedure should be framed under the Act and also in the Bill.

Section 42 — nomination by depositor: Here again, Sections 109A and 109B of the Act relating to nomination by depositors as well as the revised form prescribed for the purpose are required to be examined and a uniform nomination law enacted for all corporate depositors of financial and non-financial companies.

In sum, the cause is one. All companies are formed under one statute, that is, the Companies Act. But there are various regulatory authorities under different rules and regulations with little difference as far as the objective goes — protect corporate depositors' interest, that is. There is no reason to have such multiplicity of regulators and watchdogs, as it helps unscrupulous businessmen get away.

Hence, experience over the last 40-plus years shows, there is a need for consolidation of all the rules and regulations. And all the resources with different authorities need to be transferred and vested in one authority. The long awaited insurance cover from general insurers, private or public, must be launched as an additional safety measure for corporate depositors.

(Concluded)

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