Subject NOT available

click here for IIIF manifest

REGISTERED No. D. 221

The Gazette of India

EXTRAORDINARY

PART II—Section 2

PUBLISHED BY AUTHORITY

No. 5] NEW DELHI, TUESDAY, FEBRUARY 23, 1965/PHALGUNA 4, 1886

Separatepagingisgiventothispartinorderthatitmaybefiled

as a separate compilation

LOK SABHA

The following Report of the Joint Committee on the Bill further to amend the Companies Act, 1956 was presented to Lok Sabha on the 23rd February, 1965: —

Composition of the Joint Committee

Lok Sabha

Shri S. V. Krishnamoorthy Rao — Chairman

MEMBERS

2. Seth Achal Singh 3. Shri A, Shanker Alva 4. Shri Ramachandra Vithal Bade 5. Shri Rajendranath Barua 6. Shri Bali Ram Bhagat

7. Shri Dinen Bhattacharya ;

(57)

907 G of I. Ex.—1.

8. Shri N. C. Chatter] ee

9. Shri Sachindra Chaudhuri

10. Shi N. Dandeker

11. Raja P. C. Deo Bhanj

12. Shri Bhaskar Narayan Dighe

13. Shri G. N. Dixit

14. Shri Gajraj Singh Rao

15. Shri Prabhu Dayal Himatsingka

16. Shri Cherian J. Kappen

17. Shri R. N. Yadav Lonikar

18. Shri Madhu Limaye

19. Shri Ghanshyamlal Oza

20. Shri Shivram Rango Rane

21. Shri J. Ramapathi Rao

22. Shri R. V. Reddiar

23. Shri Era Sezhiyan

24. Swami Ramanand Shastri

25. Shri Digvijaya Narain Singh

26. Shri Sivamurthi Swami

27. Shri Radhelal Vyas

28. Shri K. K. Warior

29. Shri Nagendra Prasad Yadav

30. Shri T. T. Krishnamachari

Rajya Sabha

31. Shri Liladhar Asthana

32. Shri Mohan Singh

S3. Shri Babubhai M. Chinai

34. Shri Vimalkumar M. Chordia

35. Shri Khandubhai K. Desai

36. Shri Suresh J. Desai

37. Shrimati Shyam Kumari Khan

38. Prof. Mukut Behari Lai

39. Shri Dahyaibhai V. Patel

40. Shri P. Ramamurti

41. Shri N. Sri Rama Reddy

42. Shri Awadheshwar Prasad Stnh"

43. Shri Rajendra Pratap Sinha

44. Shri Hira Vallabha Tripathi

45. Shri Ramesh Chandra Vyas

DRAFTSMEN

1. Shri S. P. Sen Varma, Special Secretary, Legislative Depart' ment, Ministry of Law.

2. Shri G. R. Bal, Joint Secretary and Draftsman, Ministry of Law.

REPRESENTATIVE OF THE MINISTRY

1. Shri R. C. Dutt, Secretary, Ministry of Finance, Department of Company Law and Insurance.

2. Shri B. M. Mitra, Joint Secretary, Ministry of Finance, Depart ment of Company Law and Insurance.

3. Shri B. P. Roy, Secretary, Company Law Board, Department of Company Law and Insurance.

SECRETARIAT

Shri B. B. Tewari—Deputy Secretary.

REPORT OF THE JOINT COMMITTEE

1. the Chairman of the Joint Committee to which the Bill* further to amend the Companies Act, 1956 was referred, having been autho- rised to submit the report on their behalf, present this their Report, with the Bill as amended by the Committee annexed thereto.

2. The Bill was introduced in Lok Sabha on the 21st September, 1964. The motion for reference of the Bill to a Joint Committee of the Houses was moved in Lok Sabha by Shri T. T. Krishnamachari, the Minister of Finance, on the 17th December, 1964 and was dis- cussed on the 17th, 18th and 21st December, 1964 and was adopted on the 21st December, 1964.

3. Rajya Sabha discussed and concurred in the said motion on the 24th December, 1964.

4. The message from Rajya Sabha was published in the Lok Sabha Bulletin, Part II, dated the 26th December, 1964.

5. The Committee held 9 sittings in all.

6. The first sitting of the Committee was held on the 26th Decem- ber, 1964 to draw up a programme of work. The Committee at this sitting decided to hear evidence of associations etc. desirous of pre- senting their views or suggestions before the Committee and to issue a press communique inviting memoranda for the purpose by the 15th January, 1965.

7. Thirty-one memoranda/representations on the Bill were receiv- ed by the Committee from different associations/individuals.

8. At their second to sixth sittings held on the 18th to 21st Jan- uary and 2nd February, 1965, respectively, the Committee heard the evidence given by ten Associations/bodies.

9. The Committee have decided that the evidence given before them should be laid on the Tables of both the¹ Houses in extenso.

•Published In the Gazette of India, Extraordinary, Part II, Section 2, dated the airt September, 1964.

10. The Committee considered the Bill clause by clause at their seventh and eighth sittings held on the 3rd and 5th February, 1965, respectively.

11. The Committee considered and adopted the report on the 17th February, 1965.

12. The observations of the Committee with regard to the princi- pal changes proposed in the Bill are detailed in the succeeding paragraphs.

13. Clause 5: It was represented to the Committee that if the existing Companies were also to be required to re-draft their object clauses, then that would require the passing of special resolution under the Act, which would involve tremendous time and effort not commensurate with the results intended. The Committee, therefore, feel that this clause should be amended to provide that the provi- sions of existing clause (c) of Section 13 of the Act should continue to apply to companies in existence immediately before the com- mencement of the Companies (Amendment) Act, 1965 and the pro- visions of the proposed new clause requiring the division of objects into (i) main objects and objects ancillary thereto and (ii) other objects should apply only to new companies.

The clause has been amended accordingly.

14. Clause 9: The Committee noted that the entire amount of the minimum subscription for shares is not invariably called for at one time and feel that the proposed new sub-section (4) (b) should apply only to the amount payable on applications in respect of the minimum subscription.

The Committee also feel that the punishment clause in the exist- ing sub-section (4) of section 69 of the principal Act should be retained.

The clause has been amended accordingly.

15. Clause 11: The Committee feel that in sub-clause (a) of the clause, the words "and only book adjustment has been made without cash having passed" are redundant and should be omitted.

The clause has been amended accordingly.

16. Clause 12: The amendment made in the clause is clarificatory in nature.

17. Clau.se 13: The Committee are of the opinion that an instru- ment of transfer, executed before the coming into force of this

measure but which is not in conformity with the proposed provisions of sub-section (1A) of section 108 of the principal Act, should also be accepted by a company upto a period of six months from the date of coming into force of the Companies (Amendment) Act, 1965.

The Committee also feel that the provisions of this clause should not prevent any person from depositing, by way of security, any shares with the State Bank of India or any Scheduled Bank or financial institution approved by the Company Law Board by notifi- cation in the Official Gazette.

The Committee further feel that in order to avoid hardship in any case, the Company Law Board should be empowered, on an application made to it in that behalf, to extend the period mention- ed in the proposed sub-sections (1A) and (IB) in the clause by such further time as that Board might deem fit. Information relating to the number of extensions so granted by the Board and the period of each such extension should, however, be furnished in the annual report laid before the Houses of Parliament under section 638 of the Companies Act, 1956.

The clause has been amended accordingly.

18. Clause 15: The Committee feel that this clause should not apply to—

(a) any existing company" except where it commences any new business which is not germane to the business which it is already carrying on at the commencement of this Bill, when enacted;

(b) any new company except where it commences any busi- ness in relation to its objects which are not its main objects or objects incidental or ancillary thereto.

The Committee also feel that private companies should continue to be excluded from the purview of section 149 as at present. Sub- clause (b) of this clause has accordingly been omitted.

The Committee further feel that even if a special resolution can not be passed when it is required, the Company Law Board should be empowered to allow the company to commence such business even if it is passed by a simple majority which is not sufficient for the passing of a special resolution.

The clause has been amended accordingly.

19. Clause 16: The amendment is of a drafting nature.

20. (Original Clause 17): The clause has been omitted as a con- sequence of the omission of original clause 42 (See para 26 below).

21, Clause 20 (Original Clause 21): The Committee feel that a company may be required under the proposed clause (d) of sub- section (1) of section 209 to include the prescribed particulars in its books of account only if it pertains to a class of companies en- gaged in production, processing, manufacturing or mining activities and all other companies belonging to that class are required to include such particulars in their books of account. The Committee also feel that the inspection by the Registrar, or an officer authorised by the Company Law Board, should be a routine feature and not be of an ad hoc or special nature.

The Committee are also of the view that it should be clarified that the books of account will also include vouchers which should be made available for inspection and investigation and should be preserved for a period of 8 years.

The clause has been amended accordingly. The other amend- ments are of a drafting nature.

22. Clause 21 (Original Clause 22): The Committee feel that in regard to the transactions of the company represented merely by book entries, the auditor should inquire whether they are not pre- judicial to the interest of the company.

The Committee also feel that the Central Government should con- sult the Institute of Chartered Accountants of India before Issuing an order, general or special, in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.

The clause has been amended accordingly. The other amend- ments are of a verbal and drafting nature.

23. Clause 23 (Original Clause 24): It was represented to the Committee that the number of Cost Accountants in practice in this country is extremely limited and that, therefore, cost audit, if it was to be extensive, will have to be entrusted to Chartered Accountants also. The Committee are of the opinion that this difficulty could be got over by providing specifically that the Chartered Accountants who may possess the prescribed qualifications should also be allowed to undertake cost audit under this clause.

The Committee have also noted that since the cost audit was likely to reveal certain information which was regarded as confiden- tial by the companies, the cost audit report should be filed with the Company Law Board and not with the Registrar and a copy of the report should be sent to the company.

The clause has been amended accordingly.

24. Clause 25 (Original Clause 26): The Committee feel that under the provisions of the proposed sub-section (1A) of section 240 of the principal Act, the Inspector should have the power, with the previous approval of the Central Government, to call for information or production of books and papers for the purpose of his investigation only from a body corporate and not from a firm or an individual.

The Committee also feel that the Inspector should not keep in hio custody books and papers of a company required for the purpose of his investigation, for a period of more than six months after which he should return the same. He may, however, be authorised to call for the books and papers again if they are needed by him.

The clause has been amended accordingly.

25. Clause 35 (Original Clause 36): The Committee are of the view, that the proposed restrictions on the age limit of a director should be applicable only in the case of directors of a public company or of a private company which is a subsidiary of a public company.

The clause has been amended accordingly.

26. (Original Clause 42): The Committee feel that it would be difficult for the companies to note beneficial holders of more than five percent of the equity share capital unless the concerned share- holders themselves intimate such holdings.

The Committee have, therefore, omitted this clause from the Bill.

27. Clause 41 (Original Clause 43): The Committee feel that the words "and such practice is his principal occupation" are not neces- sary and should be omitted from the clause.

The clause has been amended accordingly.

28. Clause 42 (Original Clause 44): The Committee feel that the fee for attendance of a meeting of the Board or a committee thereof should not be limited to one hundred rupees only as that is a very

small sum and that the limit may be fixed at two hundred and fifty rupees.

The clause has been amended accordingly.

29. Clause 44 (Original Clause 46): The Committee are df the opinion that no special resolution should be necessary in the case of loans made to other bodies corporate not under the same manage- ment as the lending company, when the aggregate of such loans does not exceed ten percent of the aggregate of the subscribed capital of the lending company and its free reserves^

The Committee are also of the view that certain financial institu- tions should be exempted from the operation of this clause in the same manner as under sub-section (14) of section 372 of the principal Act which restricts inter-corporate investments.

The clause has been amended accordingly. The other amend- ment is of a clarificatory nature.

30. Clause 51 (Original Clause 53): The amendment Is of a consequential nature.

31. Clauses 52 and 53 (Original Clauses 54 and 55).—The Commit- tee feel that in order to avoid delay in the liquidation proceedings the Official Liquidator should be given requisite information as soon as final meetings are held by the companies concerned accepting final dissolution so that the Official Liquidator could keep in touch with the affairs of such companies and there is no delay in his report to the Court.

The clauses have been redrafted accordingly.

32. The Committee recommend that the Bill, as amended, be passed.

NEW DELHI; S. V. KRISHNAMOORTHY RAO,

The nth February, 1965. Chairman,

Magha 28, 1886 (Saka). Joint Committee.

NOTE

I do not want to give any minute of dissent, as I have finally not dissented from the decisions arrived at. But I have always felt and even now feel that restrictive provisions in law should not be intro- duced unless the same be necessary to prevent any fraud or dis- honest practice or necessary to improve the standard.

In any event, no provision should be introduced if the only result is additional expense without any corresponding benefit.

There are some Clauses which come within both the above cate- gories. They offer unnecessary opportunity for criticism of Govern- ment.

NEW DELHI; P. D. HIMATSINGKA.

Dated the 22nd February, 1965.

MINUTES OF DISSENT

I

I believe too frequent amendment of the Company Law is uncalled for. It does not allow the Corporate sector of our economy to settle down to normal functioning. The Company Law was completely revised in 1956 with far-reaching amendments contained in as many as 658 Sections and 12 Schedules. Immediately thereafter, there were extensive amendments in 1960, then in 1962, then again In 1963 and further in 1964. The present Bill (Second Amendment Bill of 1964) is the fifth amendment Bill since the all-total revision of the Companies Act in 1956.

It is well-known that the cases into which the Vivian Bose Com- mission of Inquiry looked into and about which the Daphtary- Shastri Committee recommended, arose under the Companies Act of 1913, when the law and its administration were both loose and less stringent. But after major revision of the Company Law in 1956, as the Government spokesmen in the Parliament have themselves stat- ed, there has hardly been any serious infringement of the Law. The Reports on the working and administration of the Companies Act also bear this out from year to year It seems, however, while pay- ing lip-sympathy to the role of the Corporate Sector in our mixed economy, the Government are out to catch every pretext to enfetter the normal functioning of companies and assume more and more powers for themselves, which of course would give rise to corruption and political patronage.

This is especially unfortunate at a time when the economy of the country is in a sorry plight. Shortages all around, failure to achieve targets, soaring prices and a critical foreign-exchange position are but symptoms of the economic mess in which the Finance Ministry finds itself today. The capital market is dead and the investment climate has petered out. The only sane policy at this juncture is to help mobilise more and more savings into channels of joint-stock activity, with a view to rapidly increase production in all sectors of the economy. Frequent, undue and unimaginative tightening of the Company Law and vesting wide powers into the hands of the offi- cials and their sub-ordinates, positively defeat this purpose, dis- courage corporate activity in the country and disillusion the hesitant foreign participant in equity capital.

Coming to the specific provisions of the Bill as emerging out of the Joint Committee, Clause 13 now provides that all transfers of shares shall be In a prescribed form, with the date stamped thereon by the prescribed authority and shall be delivered to the Company for registration within six months in the case of quoted shares and within two months in all other cases. Transfers deposited with the State Bank or any Scheduled Bank or financial institution approved by the Company Law Board, by way of security against a loan, are exempted. The Company Law Board are also empowered, in cases of hardship, to extend the time limit for delivering the transfers to the Company for registration. I believe this time limit of six months and two months is too short and should be extended at least to one year clearly in the statute. Moreover, exemptions should also have been made in the case of recognised trust holding blank transfers given by the trustee nominally holding in his name the shares belong- ing to the trust, In the case of companies giving guarantees and in the case of a company nominating a director on the board of another company and allowing that director to hold the qualification shares in his own name. Transfers of shares of private companies should also have been exempted, as recommended by the Inquiry Commis- sion. I also believe that the issue of thousands of prescribed transfer forms daily, with the date marked thereon, by one prescribed autho- rity, would only entail undue delay, thereby impairing the normal working of the stock exchanges in the country and giving rise to corrupt practices.

Clause 35 precludes a person from holding the directorship of a public company or of a private company which is a subsidiary of a public company, after he attains the age of seventy-five. I believe holding of high offices after the age of seventy-five should not be the privilege of politicians only. When a company in a general meet- ing approves by a special resolution any director continuing on its board after he attains the age of seventy-five, he should be allowed to continue. This will help the company to be assured of the experi- enced direction of a founder or a promoter, If he is in active health after the age of seventy-five.

Clause 44 widens the restrictions under section 370 of the princi- pal Act, on Intercompany loans. The new proviso prescribes a limit of thirty percent of the subscribed capital and free reserves of the lending company, for loans to any body corporate, not under the same management as the lending company and a limit of twenty percent of the subscribed capital and free reserves of the lending company for loans to companies under the same management as the lending company. Within these limits (except up to ten percent of

the subscribed capital and free reserves of the lending company for loans to companies not under the same management) a special reso- lution authorising the lending company to make loans up to the prescribed limits would be now required. For making loans beyond these prescribed limits, prior approval of the Central Government will have to be obtained. I believe these restrictions are unnecessary and would only hamper the free flow of essential day to day working capital. Many companies have surplus funds while many others are In need of funds to tide over temporary difficulties. The surplus funds adjust themselves to the emergent spots at the proper rate of interest for just the necessary time. The prior approval of the Cen- tral Government for making loans beyond the prescribed limits, which by themselves are meagre may take six to eight months, by which time the very purpose of the loan would be lost. This clause ignores the essential temporary and emergent character of Inter- company loans and would only make the day-to-day working of com- panies more difficult and irksome. The existing provisions of the Companies Act (sections 295, 369 and 370) already provide for the necessary restrictions on the powers to make loans and further res- trictions are absolutely uncalled for.

Everybody appreciates that a certain degree of control over management is necessary in the interest of the investing public. But the existing Company Law is already voluminous and complex. Even now for almost everything the companies have to look to the Government for approval. Before the companies know the existing law and normalise themsleves, a further spate of amendments are coming almost every year, at times twice a year. Such incessant bewildering change of law in a vital sphere of productive activity, would only imperil the economy of the country.

NEW DELHI; DAHYABHAI V. PATEL.

Dated the 18th February, 1965.

III

The Bill as reported by the Joint Committee has emerged greatly improved. I am largely in agreement with the various changes that have been made. I have, however, some changes to suggest in regard to some clauses mentioned below:

Clause 20 (Original Clause 21): In original clause 21, it was provided that the books of account shall be Open to inspection during business hours by the Registrar or by any officer authoris- ed by Government. It was also provided by means of a proviso, that no such Inspection shall be made by the Registrar or such Officer unless he is of opinion that sufficient cause exists for such inspection. The proviso has been deleted by the Joint Commit- tee and it is stated in the Report that the Committee feel that the inspection by the Registrar or an officer authorised by the Com- pany Law Board should be a routine feature and not be of an ad-hoc or special nature. I feel that this change is not reasonable and that inspection should be made by the Registrar or other Officer only if he is satisfied or is of opinion that sufficient cause exists for the inspection. The original provision should stand.

Clause 27 (Original Clause 28): This clause amends section 241 and provides that interim reports submitted by an Inspector need not be sent to the company. I feel that the interim report as and when submitted by the Inspector should also be sent to the company. This is only fair, because if the compony is furnished with a copy of the interim report, it will be able to make suitable

representation to correct any misapprehension on the part of the Inspector. This will help in the final report being made on a correct appraisal of facts and circumstances.

Clause 51 (Original Clause 53): This clause proposes deletion of Sections 410 to 415 thereby abolishing the present Advisory Commission and constituting instead an Advisory Committee which will not, however, have the same powers and functions as the Advisory Commission. The setting up of the Advisory Com- mission was fully debated in Parliament when the Companies Bill of 1953 was under discussion. It was also carefully considered by the Joint Cdhimittee on the said Bill. The Joint Committee then recommended that the Advisory Commission should adequately represent the various interests concerned and that it should be put on a permanent basis. The then Finance Minister, Shri C. D. Desh- mukh, while speaking in the Lok Sabha on the functions of the Ad- visory Commission, expressed the hope that in course of time the Ad- visory Commission will help Government to build up sound traditions for regulating the working of Joint stock companies in this country. The Reports of the Company Law Advisory Commission for the last several years which are appended to the Annual Reports on the Working and Administration on the Companies Act, 1956 furnish proof of its usefulness and also that it has been building up such sound tra- ditions in respect of various matters which had come up before it. It has also, so far as I am aware, infused a sense of confidence in the business community, who have a feeling that their problems are also looked into by an impartial authority and are not dealt with arbitra- rily by Government. In my opinion, it is very necessary that the sense of confidence which the working of the Advisory Commission has engendered in the business community should not be disturbed. In view of the careful consideration which had been given to this ques- tion by Parliament and by the interests concerned at the time of the deliberations on the Companies Bill, 1953, and in view of the success- ful working of the Advisory Commission during the past few years, I feel that the Advisory Commission should be retained. I am, there- fore, for the deletion of this clause.

Clause 56 (Original Clause 58): A new section is proposed to be inserted so that Government or any person is not compelled to disclosp the sources of information received by it or him to any Court, Tribunal or other authority. This provision in my opinion is not in consonance with sound juridical principles. It will open up opportunities for supplying false information by interested parties in order to black- mail a company or those in management of a company for their ul- terior objectives. Every person against whom any information is given Is entitled to know the identity of the Informant and has also

a right to check on the integrity of the person and the authenticity of the information. I feel that if this right is not available to aggriev- ed parties, it will encourage black-mailing by unscrupulous persons and also encourage vindictive actions by prejudiced officers. The powers of a Court or a Tribunal which is a quasi-judicial body should not also be curtailed in an arbitrary and unfair manner.

NEW DELHI; N. C. CHATTERJEE Dated the 19th February, 1965.

IV

This Bill seeks to implement the recommendations of the Com- mission of Inquiry end the Daphtary—Sastry Committee. The Joint Committee has taken this opportunity to:

(i) strengthen the provisions relating to investigation into the affairs of companies and provide for more effective audit in dealing with cases of dishonesty and fraud in the corporate sector; and

(ii) simplify some of the procedural matters.

But if we go through the amended Bill, in all Its practical • aspects, we can say without any fear of contradiction that the Joint Committee have failed to meet the real object of the Bill by ignor- ing certain important demands of the share-holders' associations and chartered accountants' association and prominent auditors' views aj urged by them in their respective memoranda and evidence tendered before the Joint Committee-

One of the main demands of the share-holders association was to provide a statutory obligation on the part of the Directors and manag- ing agents to take necessary approval of the general body of share- holders in respect of all matters of financial dealings. Each end every share-holder should be individually informed at least one month before the meeting about the proposed resolutions and actions to be brought before the general body meeting, besides news-paper pub- lications- Except few major financial business, there is no amend- ment to meet the general but rightful desire of the share-holders as such. The scope of strength and working freedom should be en- larged whereas all public limited companies' authority and scope of working should be exercised absolutely with broad based principle! of democracy and socialism by accepting all special resolutions that are passed on the basic ideology of voting i.e., "one man one vott" irrespective of his share contributions.

H07 G of I Ex.—3.

Ii! this procedure is not introduced in ell public limited compa- nies, the purpose of all special resolutions would be defeated by big financial magnates in all public Companies. Hence I disagree with the amended Bill simply providing special resolutions without intro- ducing the principle of "one man one vote" irrespective of his/her share-values in that particular company. Otherwise, the affairs of companies, at least in dealing with cases of dishonesty and fraud in the Public Corporate Sector, cannot be investigated properly. The spirit of that object will be defeated.

It is necessary to appoint independent auditors with strong charac- ter for making the audit more effective and purposeful. The Cen- tral Government should maintain a list of expert auditors, Chartered Accountants and Cost Accountants in consultation with the Chartered Accountants associations and Cost Accountants bodies as approved by the Union Government. The rules and procedures of auditing systems in various fields should be framed and accepted with full consultation of respective recognised auditors and their organised bodies. At every step their active consultation and cooperative efforts will give good results to remove dishonesty and fraud in the Corporate Sector. The auditors' position should not be as that of a Commission agent or servant of any company, but his position should be a very powerful one who can play an eminent part to check all kinds of malpractices committed by officials of Company Law admi- nistration or Directors of any company. Any company may go astray if such full powers are not vested in auditors and their parent bodies to supervise, guide and control the finances according to the strict observation of the respective bye-laws that are accepted by the general body of share-holders. So there should be statutory provi- sion to have frequent consultations and investigations of frauds in the companies by the auditors or group of auditors' body with inde- pendent powers to take necessary steps to remedy the situation. Company Law administration is more powerful which is likely to become over-lord of the companies and it is but natural that absolute powers will positively corrupt the Company Law administration. Therefore, always there should be a statutory obligation on the part of the administration so that each and every action or rules and re- gulations of auditors and accounting system should be laid on the Table of both the Houses of Parliament. In case of glaring injustice by Company Law administration, a discussion may be raised in Par- liament.

There are so many small and medium size companies having very littl" profit. During initial periods every company will gain no

profit or there may even be some losses to the new companies. There- fore, it would be grave injustice to the directors or managing part- ners to fix their remunerations only on the basis of profit percentage. As a special remuneration to the working directors for a specific period at least, a total of one thousand rupees per month should be given as per the approval of the share-holders' general body meetir,?. Instead of restricting the remuneration only on profit percentage basis, certain amount as decided by the general body members should be given to the working directors according to their capacity and abilities.

Many political parties, especially the ruling party, depend upon public and private companies' donations to further their programmes. Under the existing law upto 5 per cent of the net profits can be donat- ed to any political party as per decision of the directors only, whereas general share-holders belong to all political parties. Therefore- clause 44 (Original Clause 46) may be amended with the following proviso to check the political interference in the administration of companies:

"Provided further that the total donations so made to all poli- tical parties and charitable registered institutions cor- porate shall not exceed without the prior approval of the general meeting of the share-holders:

(a) Five per cent of the net profit for the current balance sheet of the previous year of the donating company;

(b) any percentage of the net profit or reserve fund of the liquidating company where all such donations are made to any of the charitable non-political institutions as recommended and approved by the special resolu- tion of the share-holders passed by two-third majority in such general meeting."

The assets of any liquidating company may be transferred -to any one or more charitable non-political institutions as approved by the share-holders of that company. Hence I am obliged to record my minute of dissent.

NEW DELHI: SrVAMUBTHT SWAMI.

Dated the 22nd. February, lftflfj.

VI

We are afraid that the present piece of Legislation, far from re- moving the lacunae and plugging the loopholes, has given further lease to the malpractices by the companies and corporate sector. It is regrettable to note that even the amendments that were suggested in the Bill have been watered down in the Joint Committee.

Regarding the blank transfer system, we strongly feel that it should have been completely abolished as in the United Kingdom. While the Government is fully aware of the havoc done by the busi- ness tycoons with the nefarious practice of blank transfer system, still they plead helpless in rooting out this evil. Coming to clause 23 (original clause 24) the Joint Committee have recommended that chartered accountants who may possess the required qualities should also be allowed to undertake cost audit. The reasons that the num- ber of cost accountants in practice is very limited does not appear to be justified to us- We feel that if enough scope is given, more cost accountants will become available. Even if the required number of cost accountants were not forthcoming the Government may hove constituted a separate cadre of cost accountants as full time public servants to carry on the job.

NEW DELHI; DINEN BHATTACHARAYA

Dated the 22nd February, 1965. K. K. WAHTOR

vn

It was after prolonged, exhaustive and protracted enquiries ex- tending over some years, that the law relating to companies in India was thoroughly recast and comprehensively codified in a voluminous

self-contained enactment,—The Companies Act, 1956,—containing 658 Sections and XII Schedules. It was further amended extensive^ ly in 1960, 1962, 1963 and 1964. The present Bill,—The Companies (Second Amendment) Bill of 1964, seeks once again to amend it very extensively.

The continual amendment of such an important enactment govern- ing a very significant and most active part of the Private Sector in the Indian economy is itself a sufficient condemnation of the present Bill. This a priori view is strengthened by a closer examination of the ostensible reasons advanced in support of it, namely, that it seeks:

(a) to implement the recommendations of the Commission of Inquiry into the administration of the Dalmia-Jain Companies, aa reported upon by the Daphtary-Sastri Committee;

(b) to strengthen the provisions relating to investigation Into the affairs of companies;

(c) to provide for more effective audit in dealing with cases of dishonesty and fraud in the corporate sector; and

(d) to simplify some of the procedural requirements which are at present burdensome to the companies without being of corresponding advantage to Government.

Of the foregoing reasons for introducing this Bill, it is plain that the last of them was merely incidental. The principal reasons ad- vanced in support of this measure were admittedly those indicated at (a), (b) and (c) above. But on examining these more closely, It transpires that as regards the first and most important of them there was no evidence at all,—certainly none was adduced on behalf of Government before the Joint Committee,—that fraudulent practices of the kind discovered in the Dalmia-Jain Companies were "legally" possible, or had in fact been resorted to, even under the present state of the law. It is important to note in this connection that the legal framework within which industrial and commercial concerns in the corporate sector have now to operate is far more com- plex than was the case before 1953. They have now to comply not merely with the complicated and rigorous provisions of an all-em- bracing Companies Act, but also with other relevant and very com- prehensive group of legislation such as that regulating the Issue of Capital, the licensing of new industrial units and of their expansion, the licensing of Import of Capital Goods, Raw Materials, Stores and Spares, the Regulation of Foreign Exchange transactions and the

like. With this sort of multifarious and integrated regulatory legis- lation already in force, governing almost every important area of activity, superimposed upon the already comprehensive Companies Act, it is in my opinion quite unlikely that "legal frauds" in company management and administration of the kind and magnitude disclosed in the Dalmia-Jain Companies can occur any longer.

The other two purposes advanced in support of this Bill, namely, to strengthen the provisions relating to investigation into the affairs of companies and to provide for more effective audit in dealing with cases of dishonesty and fraud, are also entirely unsupported by any evidence justifying the need for such extraordinarily wide-sweeping powers as are sought to be conferred upon the Central Government for these purposes by this Bill. Moreover, while the "Statement of Objects and Reasons" refers in this connection to additional powers required in dealing with specific cases of this type, the relevant clauses in the Bill go much further and are designed to confer upon the Central Government draconian powers over nil companies, regardless of the character of their management.

I am firmly of opinion that this measure is both unnecessary and undesirable. It will confer powers upon the Company Law Board and/or the Central Government in relation to the generality of com- panies which are quite uncalled for. It will cast an unjust and griev- ous burden upon the vast majority of honest companies, most of them engaged in medium or small scale industries, just at a time when the most urgent need is that the private sector should rapidly and vigorously go forward and produce more and more goods and services so that the economy, which has been stagnant in recent years and is now in the grip of acute inflation, may once again be- come as buoyant as It was some four or five years ago. If this mea- sure is enacted the capital and investment market will continue to remain depressed; the economy will remain stagnant; and perhaps, its gravest consequence will be not merely to discourage foreign in- vestment and/or collaboration in Indian projects, but even to induce a good deal of dis-Investment. I am strongly of opinion, therefore, that this Bill should be withdrawn.

Subject to my basic objection to the Bill as a whole, I turn now to some of the specific clauses of the Bill as reported by the Joint Committee. While the Bill has emerged from the Committee with some improvement, there remain many matters in respect of which it still requires to be considerably altered. Some of the more im- portant of these are mentioned below: —

Clause 13—This clause suffers from two major defects, namely, (1) The period of currency of blank transfers in the pres- cribed form should be twelve months, instead of six.

Without this, the liquidity of the share markets will be seriously impaired.

(2) In the case of Shares held in fiduciary capacity, there should be no time limit to the currency of blank trans- fers as in the case of Shares pledged with banks and other financial institutions.

Clause 20 (Original Clause 21)—In this clause as originally drafted it was provided (by means of a proviso) that the books of account of a company shall be open to inspection during business hours by the Registrar or by any officer authorised by Government provided he was of opinion that sufficient cause existed for such ins- pection. That proviso has been deleted by the Joint Committee on the ground that the inspection by the Registrar or an Officer autho^ rised by the Company Law Board should be a routine feature of the administration of Company Law in this country. This is not reason- able, for I feel that such inspection by the Registrar or other officer should be made only if he is satisfied that sufficient and specific cause exists for the inspection. The original proviso should there- fore be restored.

Clause 21 (Original Clause 22)—Sub-Clause (b) should be deleted altogether, as it virtually confers unlimited power upon the Central Government to enact substantive legislation concerning the duties and responsibilities of Auditors far beyond anything contem- plated by Section 227 of the principal Act,

Clause 23 (Original Clause 24)—This Clause, which provides for the compulsory audit of cost accounts of companies engaged in pro- duction, processing, manufacturing or mining activities, should be deleted altogether for the following reasons: —

(i) The regular maintenance of proper cost accounts, which it implies, presupposes a sophisticated stage of indus- trial development and management accounting which it will take considerable time to reach in this country.

(ii) It was admitted in the evidence submitted before the Joint Committee on behalf of two such authoritative bodies as the Institute of Chartered Accountants of India and the Institute of Cost & Works Accountants of. India that no more than about 20 per cent of companies in India were maintaining any sort of cost accounts pro- perly so called.

907 G. of I. Ext.—4.

(iii) To require a statutory audit of cost accounts would, in these circumstances, be wholly premature.

(iv) It would impose an unwarranted burden upon small com- panies engaged in medium and small scale industries.

(v) It was also admitted that the number of experienced accountants, especially Cost Accountants, competent to undertake such audit was strictly limited, there being only some eight or ten firms of Cost Accountants in practice.

(vi) Moreover, to prescribe an audit of cost accounts indepen- dently of the audit of financial accounts, as is proposed in this clause, could lead to conflict and confusion as between the two.

(vii) The disclosure of the cost structure of companies engaged in competitive enterprises would cause serious dis- advantage to the best managed companies; and this sort of prospect (of publicity being given to confidential cost data) would almost certainly persuade manv prospec- tive foreign concerns not to proceed with their invest- ment and|or collaboration projects in India. It would be no answer to their genuine apprehensions in this respect that the Cost Audit Report would be submitted only to the Central Government and would not have to be filed with the Registrar of Companies. Once a statu- tory Cost Audit was known to have been undertaken, every Shareholder would be entitled to have a copy of the relevant Audit Report, with the result that the con- fidential character of the cost data could not possibly be preserved.

(viii) So far as is known, there is no other countrv in which companies are required by law to maintain cost accounts or to have them audited.

Clause 25 (Original Clause 26) — This clause, in so far ss it applies to a company whose affairs are not under investigation, that is to say, to a body corporate "other than a body corporate referred to in sub-section (1) (of Section 240)", needs extensive amendment. The effect of this Clause as it stands is that such a company would be treated in all r e s e ct on the same footing as if its affairs were also under investigation. This is most unreasonable "and would be des- tructive of the credit and reputation of such companies.

Clause 51 (Original Clause 53)—By this Clause, whirh deletes sections 410 to 415 of the principal Act, it is proposed to abolish the Company Law Advisory Commission and to appoint instead an "Advisory Committee" for advising upon "such matters arising out of the administration of this Act as may be referred to it" by the Central Government or the Company Law Board.

This constitutes a complete reversal of policy without any justi- fication whatsoever. The setting up of the Advisory Commission as a permanent feature of the Company Law administration was care- fully examined by the Joint Committee on the Companies Bill 1953 and was subsequently fully debated and approved in Parliament. On that occasion the then Finance Minister made the following state- ments in Parliament: —

"In future the permanent Advisory Commission will have the duty of advising Government in respect ot those matters which are specifically provided in the B i l l . . ,. it is my hope that in course of time this Advisory Com- mission will help Government to build up sound tradi- tions for regulating the working of joint stock com- panies in this country."

"I should say that the chances are that in almost all cases—I should not like to mention a percentage—we shall be guided by the advice of the Advisory Commission."

"What I foresee is that a body of case law will grow as a result of the close working of t he advisory commission and the central authority. Both of them will learn; what I expect is as a result of these discussions, a body of case law and philosophy will grow, and we shall jointly re- gulate the affairs of the companies in these respects which are in controversy today."

As against this, neither in the "Statement of Objects and Rea- sons" nor in the "Notes on Clauses" of the present Bill are there any reasons advanced for abolishing what was intended to be, and what indeed Parliament desired should be, a "permanent" Commission. Similarly, even in the Joint Committee, no attempt was made to justify this drastic proposal.

The Reports of the Company Law Advisory Commission and of the Company Law Administration for the last several years furnish ample proof of the usefulness of the Commission over these years. The present sections 410 to 415 include provisions which made it obligatory for Government to refer certain important matters to the

Advisory Commission for their advice. In the discharge of its duties the Commission has done much to inspire confidence in the corpo- rate sector vis-a-vis the exercise of purely executive powers by Gov- ernment in a field in which such powers are vast and all pervasive and the scope for arbitrary decisions extensive. The Advisory Com- mission has, in fact, gone a long way towards fulfilling those hopes and expectations with which it was constituted with the full approval of Parliament. In these circumstances, I am unable to see any justi- fication whatsoever for replacing the Commission by an "Advisory Committee" which need not be consulted by Government at all and which, having no statutory powers or duties, can fill only a minor role of little value either to Government or to the corporate sector. This Clause should therefore be deleted.

Clause 56 (Original Clause 58)—This is a most extraordinary provision, it seeks to substitute the present Section 635A of prin- cipal Act by two new Sections 6S5A and 635AA which would have the effect not merely of protecting the Government and public servants for anything done in good faith but also of shielding in- formers and blackmailers even when, acting in bad faith, they may active the machinery of Government against innocent parties. To claim the privilege of secrecy, even against courts and tribunals, so as to resist the demand by injured parties for the disclosure of the source of information which may have resulted in their harassment or in wrongful action being taken against them, can never be justi- fied. This sort of claim, if conceded, would almost certainly lead to grave abuses. It would lay the basis for false information by inter- ested parties and even blackmailers against a company and its man- agement; and it can also be misused as a weapon for political pur- poses. In view of this, the proposed new section 635AA sought to be inserted by this Clause should be deleted.

NEW DELHI; N. DANDEKER

Dated the 22nd February, 1965.