The Hindu Business Line : Doesn't `paid-up' capital deserve sanctity?

The ICAI wants the amount agreed to be subscribed at the time of incorporation to be shown under `subscribed and paid-up capital' though the amount has not been paid up.

Section 3 of the Companies Act, 1956 (the Act) defines a company. The Section was specifically amended by the Companies Amendment Act, 2000 so as to ensure that only those interested in genuinely carrying on business as corporate entities are permitted to incorporate companies, private or public.

Also, the amendment seeks to discourage the heinous practice of incorporating bogus companies for sale across the table to those interested in forming a company in a jiffy.

Section 3 (1)(iii) defines a private company as one with a minimum paid-up capital of Rs 1 lakh. Section 3 (1)(iv) amended the definition of a public company to mean one with a minimum paid-up capital of Rs 5 lakh or such higher paid-up capital as may be prescribed.

What, in effect, is happening is the negation of these avowed objectives. The Registrar of Companies (RoC), who is responsible for incorporation of companies, can be regarded to be guilty of contravention of the aforesaid provisions for not ensuring that the subscription amount has been paid up by the subscribers. The following provisions are relevant for the purpose.

Section 12(1) of the Act prescribes "any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to the memorandum of association and otherwise complying with the requirements of this Act in respect of registration can form an incorporated company, with or without limited liability." Section 14 of the Act prescribes that memorandum of association of a company shall be in one of the forms in Tables B, C, D, and E in Schedule I as may be applicable to the case of the company or in a form as near thereto as circumstances admit.

In terms of these, every subscriber has to agree to take the number of shares in the capital of the company set opposite to their names.

The mischief arises in over-emphasising the words "agreed to take". In effect, at the time of incorporation, the subscription amount is not brought in with the result the company does not have, at the time of its incorporation, the minimum paid-up capital. Simply put, the subscribers have not paid the money, but merely agreed to take up. This is inconsistent with the spirit underlying Section 3. On incorporation, the amount is shown as that receivable from subscribers.

This gives room for continuation of malpractices which existed before the amendment to Section 3, and it is left to the buyers of the company either to cough up the amount or continue to show the amount as debt receivable. Over time, the debt can be written off as not being receivable.

To make matters worse, the Institute of Chartered Accountants of India has opined that the amount agreed to be subscribed at the time of incorporation be shown under the head "subscribed and paid-up capital" even though the amount has not been paid-up.

Definition of `member'

Adding to the confusion is the definition of `member' under Section 41 according to which i) the subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members; ii) every person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company.

Moreover, subscribers to the memorandum of association shall be deemed to be the first directors of the company unless the articles of association prescribes otherwise. This can lead to an anomalous situation where the subscription amount remains unpaid and is shown as debt recoverable which is written off subsequently and the subscribers continue to be members without having paid up the subscription amount.

Till such time steps are taken to remedy the inconsistencies, the RoC can issue, on completion of all formalities, an `in-principle' letter. And on being satisfied that the subscription amount has been received within ten days of such letter, the incorporation certificate can be issued from which date the company shall come into existence.

(The author is a Pune-based company secretary.)