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Arvind P. Datar

RECENTLY, the outgoing Secretary to the Department of Company Affairs (DCA) sought to justify various provisions of the Companies (Amendment) Bill, 2003. The corporate sector has, however, severely criticised the provisions relating to, among others, independent directors and restrictions on chartered accountants. The Secretary pointed out that these provisions are necessary because of the "black sheep" and "vanishing companies" in the corporate sector.

An examination of the Bill shows that several of the provisions are wholly unnecessary. The existing provisions of the Companies Act, 1956 can adequately deal with the problems facing the corporate sector.

Black sheep

An impression is sought to be given that the Companies Act is inadequate to deal with erring directors and promoters. However, an examination of the relevant statutory provisions makes it abundantly clear that the Act has enough bite to deal with not only fly-by-night operators but also established companies that take investors for a ride. Unfortunately, many of these provisions are seldom invoked.

Prospectus

The Companies Act contains penal provisions for false statements made in prospectuses. Under Section 63 of the Act, every person who authorises the issue of a prospectus can be punished with imprisonment, which may extend to two years, or a fine (of up to Rs 50,000). But an examination of the reported case laws shows that there is scarcely any on the subject.

While the `vanishing companies' list is long, hardly any prosecution has been launched against the major defaulters. If the DCA was serious about investor protection, it could have easily taken up a few cases where false statements had affected a large number of investors and immediately filed a complaint.

Statistics show that very few complaints have been filed. This would mean that one can mop up crores of rupees from the public and swindle them with impunity.

Apart from the Companies Act, it is open to the DCA to ensure that criminal cases are filed through the crime branches of individual States. In many of these cases, a good case for prosecuting such directors and promoters can easily be made out.

Fixed deposits

Thousands of depositors have been cheated of their fixed deposits. In the case of several non-banking companies, the collapse came because of overnight restrictions imposed by the RBI. These restrictions could have been introduced in a phased manner. There are also a number of cases where companies have defaulted on repayment of deposits but nothing has been done by the DCA.

As per Section 58A of the Companies Act, failure to repay the depositors is an offence attracting imprisonment of up to five years and a fine too. In addition, the company is liable to hefty fines under Section 58A(5), which was inserted in 1975. It will be interesting to find out how many prosecutions were launched by the Department against defaulters over the past 25 years.

A prosecution under this Section would be simple and conviction virtually guaranteed. All it requires is to produce two or three cases where a deposit has not been repaid within the time specified. The offence is also not compoundable. But statistics reveal that the Department has turned a Nelson's eye to the most serious cases of default.

False statement and accounts

A simple but effective statutory provision is Section 628 of the Act. If any balance-sheet, prospectus, statement or document required under the Act contains false statements or a material omission, imprisonment of two years plus fine is attracted. The offence is not compoundable. There are several cases of balance-sheets containing false statements and misstatements in prospectuses. Filing of false returns is also common. But the relevant penal provisions are seldom invoked.

Other offences

There are numerous other provisions in the Companies Act wherein directors and officers in default can be punished for violation of statutory provisions. In reality, though, prosecutions are launched for petty matters, most of which are compoundable.

As far as the Department is concerned, such prosecutions only satisfy the statistical requirements of filing a certain number of cases. If one examines the cases filed, it is shocking that the most trivial matters have been taken up for prosecution whereas offences with devastating effect on the public have gone virtually unpunished.

The only way the public will develop respect for the law is when the penal provisions are implemented quickly and effectively.

In Singapore, for instance, no director can take the company law for granted and no builder can violate the building norms with impunity. There are no samadhan or settlement schemes, which place a premium on breaking the law.

The solution lies in implementing the existing provisions. A strong message that defaulters will be prosecuted and punished quickly must be conveyed. Filing charge-sheets or taking action months after the event makes a mockery of the entire proceedings.

In fine, the Companies Act, 1956 is fully equipped to deal with the `black sheep' and `vanishing companies'. What is required is not an amendment to the Act but a change in the mindset and attitude of the DCA.

(The author is a Senior Advocate of the Madras High Court.)

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