JUSTICE DHANUKA COMMITTEE SUGGESTIONS ON
WORKING DRAFT OF COMPANIES BILL, 1997

Definitions - Clause 2 - 

1.1Clause 2(1)(9) - "Book-building" -

In the definition of Book Building, in Working Draft of the Companies Bill, 1997, the words "and the terms of issue" should be inserted after the words "price". The words "and built up" as well as the words "for determination of the quantum of such securities to be issued" appearing in later part of the definition be deleted.

The modification suggested by the Committee is necessary in order not to restrict the purpose of Book-building to determine the quantum of the securities to be issued ` or to build up the demand'. The expression ` book-building' should be redefined so as to offer more flexibility.

1.2 Clause 2(1)(11)(e) - "Charge" - The said clause provides that the expression "Charge" shall not take within its sweep "Pledge" in respect of movable property of the company. The Committee is of the view that the transaction of pledge should also be covered by the definition of expression the `charge’ so that the creditors of the company and other concerned have knowledge of the securities and the charge created on movable assets of the company including pledge.

1.3 Clauses 2(1)(18) and 2(1)(40) - Derivative, option in securities - The Committee is of the view that the definition of expression "derivative" as well as "options in securities" under clause 2(1)(18) and 2(1)(40) of the Working Draft should find place in the Securities Contracts (Regulation) Act, 1956. As far as the expression `hybrids’ is concerned, the definition of the said expression as set out in clause 2(1)(26) may be retained.

 1.4 Clause 2(1)(31) - Listed public company - The clause defines `listed public company’ whose equity shares are listed. The definition is narrow. The criteria for listed company should be listing of any securities. It is therefore suggested that the word `equity’ be substituted by the word `securities’. Further, the following words "whether or not any other security of the company is so listed" be deleted from the said clause.

1.5 The Committee is also of the view that Clause 2(1)(57) ought to be recast as indicated below:

Clause 2(1)(57) Securities
    1. For the purpose of the Companies Act, 1956, the expression "Securities" may be defined as under:
"Securities as defined in the Securities Contracts (Regulation) Act, 1956 from time to time and includes hybrids and units or any other instrument which entitles the holder thereof to allotment to rights in any account of property or payment of money in lieu thereof at a future date".

It is pointed out that the SEBI Act, 1992 defines the expression "Security" in terms of the definition of the said expression as provided in the Securities Contracts (Regulation) Act, 1956.
 

 2. Section 43 A - Deemed Public Company - 

2.1 The Working Group recommended that Section 43A of the Companies Act,1956 should be deleted. We have carefully gone through para 2.12 of the report of the Working Group.

2.2 Section 43A was incorporated in the Companies Act,1956 sometime in the year 1960. The Working Group expressed its view to effect rationale for deletion of section 43A of the Act was mis-placed in the context of 1990s. It is common knowledge that private companies are subject to much lesser statutory control as compared to public companies of which the shares are not listed. Section 43A is applicable where the shares of the private companies are held by one or more bodies corporates to the extent of at least 25% of the paid-up share capital of the private company.

2.3 Section 43A(1A) of the Act also prescribes the criteria of large turnover of the private company for the purpose of the company being treated as a deemed public limited company. Sub-section 1(c) of Section 43A prescribes additional criteria so as to cover the situation where a private company accepts deposits from the public other than its members, directors or the relatives, after invitation for the same is made by an advertisement. Such private companies have also deemed to have become a public company. In other words, only such private companies are deemed to be public companies under the Act which are large private companies having large turnover or the company of which the shares are held by a public limited company or bodies corporates or where the private companies accepts the deposits from the members of the public as contemplated under sub-section 1(c). If such private companies are treated as deemed-public companies, such deemed public companies can be better regulated in public interest and in the interests of the investors and the depositors. If Section 43A of the Act is deleted, such private companies shall be subject to minimal control as compared to statutory control on unlisted public companies. If Section 43A of the Act is deleted, such huge private limited companies shall have to be treated merely as private limited companies with minimum control.

2.4 It is desirable that the issue and transfer of shares and securities as well as taking of deposits and advancing of loans by such private limited companies be controlled and regulated by norms applicable to public limited companies. The Committee takes the view that the omission of Section 43A of the Act may be detrimental to public interest.

3. Clause 47 - Application of Part III: 

3.1 Regulatory control of SEBI in case of listed public companies and the companies proposing to be listed:

Clause 47 of the Working Draft, inter alia, provides that the provisions of Part III shall be administered in the case of listed public companies and to companies proposing to be listed by SEBI. The said clause also provides that in all other cases, the provisions of Part III shall be administered by the Central Government.

3.2 The subject matter relating to issue and transfer of shares and securities and other matters connected with the Capital Market is not dealt with merely in Part III of the Working Draft. Some of the crucial provisions in this behalf are also contained in Part IV as well as Part VI of the Companies Act,1956. The provisions relating to transfer of securities are contained in Part IV of the Working Draft. The provisions relating to distribution of dividends, etc. are contained in Part VI.

3.3 The Committee is of the view that it should be generally provided by incorporating an additional section at appropriate place in the Working Draft so as to provide as under :

 "The provisions of this Act concerning regulation of capital market wherever contained in this Act, in case of listed public companies and the companies proposing to be listed shall be administered by SEBI". The amendments will enable SEBI to regulate all issues and aspects arising in the capital market.
  4. Clause 48 - Matters and reports to be set out in prospectus

4.1 Prospectus mandatory for public issue

The Committee is of the view that there should be a specific provision in the Act in clause 48 so as to provide that no company shall make public issue of securities unless it issues the prospectus and complies with all the provisions relating thereto. Incorporation of such an express provision would make it mandatory for all companies to issue a prospectus failing which penalty can be imposed.

4.2 Clause 48(8)(a) provides that Clause 48 shall not apply to the issue of shares and securities to the existing holders of the company even if the holders have right to renounce in favour of other person. The Committee is of the view that such rights issue with right to renounce should be treated as "deemed public issue" and provision of public issue should be applicable.

4.3 Clause 48(8)(b) provides that the provision of prospectus shall not apply relating to securities which are uniform with securities previously issued.

4.4 We feel that listed companies whenever they make a public issue should comply with the requirements of issuing a detailed prospectus for the existing and prospective investors. This clause should therefore be deleted.

5. Clause 50 - Registration of Prospectus -

5.1 Draft prospectus need be only filed with SEBI. Provisions regarding registration of prospectus be deleted. Necessary changes be made in sub-clauses (1) and (6) of clause 50. Registration of prospectus would require maintenance of record and giving of inspection thereof. Prospectus should only be filed with SEBI and registered with ROC. It would obviate duplication.

5.2 Clause 50(6) of the Working Draft suggests minor penalty for offence of not filing copy of the prospectus with SEBI or the Registrar of Companies. The Committee is of the view that the offence referred to in the said provision is far too serious. Investors and other persons of the public are taken for a ride when the prospectus is issued without a copy thereof being delivered to SEBI and the Registrar of Companies as required.

 6.3 The Committee is of the opinion that Clause 51(4) of the Working Draft should be amended by adding a proviso thereto reading as under :
  "Provided that the securities offered to the public during the period of validity of Shelf Prospectus pertains to the same class and all the relevant facts are truthfully disclosed ".

On the incorporation of this provision, an issue can be made in regard to those very securities only for which a shelf-prospectus is filed.
 

 6.4 The Committee is of the view that clause 51(7) of the Working Draft of the Companies Bill,1997 be amended so as to add the following words at the end of the said sub-clause "relying on the said Shelf Prospectus ".

  This would enable the company to issue securities through the normal prospectus.

7. Clause 52 - Book-building and Information Memorandum -

7.1 Clause 52(6) be amended so as to provide that the information memorandum shall be published at least in two local newspapers for information of public, instead of individually intimating to the person so invited.

7.2 Clause 52(8) may be revised so as to read as under :

 "The applicant or proposed subscriber shall exercise his right to withdraw from the application within 15 days from the date of closure of the issue or prior to allotment of the securities whichever is earlier ".

As the last date of withdrawal of application is not mentioned in the Act there remains an ambiguity. At the same time mis-use is made of this facility by many. The above clause strikes to achieve a balance of the two.

A similar provision be incorporated in clause 63(5) of the Working Draft. This is necessary because it is not practical and possible to send an intimation to each and every applicant. Such a provision will delay the allotment and listing of securities.
 

 7.3 Clause 52(10) of the Working Draft may be amended by adding the following words at the end of the said sub-clause " and with the SEBI. ".

8. Clause 55 - Criminal liability for mis-statements in prospectus -

  8.1 Clause 55(1) should be amended so as to prescribe penalty of imprisonment which may extend to 5 years or fine to the extent of Rs. 5 lakhs. 9. Clause 58 - Construction of references to offering securities to the public -   9.1 Private placements - The Committee is strongly of the view that private placements of securities should be regulated under the Companies Act ( 1 of 1956 ). It is common knowledge that most of the issuers are increasingly taking advantage of loopholes in respect of the private placement by issuing securities to large number of investors under the garb of private placements. The size and number of private offerings and the amounts mobilised has shot up. In context of recent events, non -regulation of private placement is of concern to everybody. The various stock exchanges have made representation to the Committee that private placement should be regulated. During the previous financial year, over Rs.19,000/- crores are supposed to have been mobilised from the private placement market.   9.2 Clause 58 of the Working draft be amended by incorporation of sub-clause (1a) and sub-clause (1b) as under:   (1a) Making private offer or invitation to offer offering securities to 50 prospective investors for subscription to the extent of Rs.5 lakhs in the aggregate shall be treated as if a "public offer" and all the norms and provisions applicable to the public offers including filing of prospectus shall be applicable to all such private placements as well.   (1b) No private company shall make an offer or issue any securities on the basis of private placement covered under sub-clause(1A) of clause 58 without filing of the prospectus and without complying with the provisions of the Act in respect of public offers and SEBI Regulations and Guidelines, if any.   By introduction of this clause private placements are sought to be regulated and the public issues in the garb of private placements are sought to be curbed.
   10. Clause 59 - Penalty for fraudulently inducing persons to invest money –

10.1Clause 59 prescribes penalty for fraudulently inducing person to invest money. Having regard to the shocking experience of continuous scams and the plight of innocent victims of fraud, it is recommended that the deterrent penalty be prescribed for the offenders who commit fraud on the investors.

10.2 It is recommended that the offender covered under the above-referred provision should be punished with imprisonment which should not be less than 3 years but which may extend to 7 years and also fine which may extend to 5 lakhs rupees or double the amount involved whichever is more.

11. Clause 60 - Impersonation for acquisition, etc. of securities -

11.1 Clause 60 deals with the subject matter of impersonation for acquisition of securities. The punishment to be prescribed for the offenders who are proved guilty of impersonation should be equally dealt with i.e. as recommended in respect of offences the offenders covered under Clause 59.

12. Clause 60A - (Proposed)

  12.1 Multiple Applications - There is no provision whereby multiple applications in an issue are sought to be prohibited and made an offence. It is therefore suggested that a new clause 60A be incorporated in the Bill so as to provide for the following:
  "Any person who makes multiple applications in different names by using different combinations pertaining to his name or using his `other names’ (`alias’) for acquiring or subscribing securities therein shall be punishable with imprisonment which may extend to 3 years and also with fine which may extend to Rs.50,000/-."
  13. Clause 60B - (Proposed) Exception to normal right of the companies to make public issue of shares - Statutory compulsion to resort to Depositories Act - Clause 60B be incorporated in the Working draft so as to read as under:-

"Clause 60B Notwithstanding anything contained in any other provisions of this Act it shall be obligatory on the part of the listed companies making initial public offer of shares or other securities for a sum of Rs.10 crores or more to issue their shares and securities only in dematerialised form by complying with the requisite provisions of the Depositories Act, 1996 and regulation made thereunder."

The incorporation of this clause will reduce paper related frauds. If the investor wants he has a right to get the securities rematerialised.

14. Clause 61 - Prohibition of allotment unless minimum subscription is received -
 

place of the words " by issue of share capital" in the fourth line thereof. Clause 61(1) of the Working draft deals with the subject matter of "allotment of securities" and not merely allotment of shares. The introduction of this clause will help compute minimum subscription on the basis of issue of securities.
  14.2 Provisions for refund of the moneys received from the applicants - The Committee recommends that clause 61(7) be amended so as to delete the words "without interest" and so as to provide for payment of interest at such rate as may be prescribed from the date of closing of subscription list till the refund is made. It is in public interest and in the interest of the investors that in default, the company and the directors in charge liable to refund the amount along with interest and be punishable also with fine at the rate of Rs.1,000/- per day from the date of default till payment.
   15. Clause 63 - Applications for and allotment of securities -

 15.1 Time limit for commencement of allotment of securities - Clause 63(1)(a) be amended

so as to substitute the words "third day" in place of the words "fifth day" in the fourth line of the clause.

This is necessary because in a book-building process the issuers should be in a position to make allotment immediately and should not be required to wait for the fifth day.
 

  15.2 Application for the securities of the company made in pursuance of the prospectus - Clause 63(5) be amended so as to enable the applicant to revoke his application for subscribing to the securities of a company until expiry of 15 days from the date of the closing of the subscription list or the date of allotment whichever is earlier.

This clause is necessary because the working bill does not have any provision specifying the last day upto which the applications can be revoked. Mis-use is being made of this omission.
 

 16. Clause 64 - Allotment of securities to be dealt in on the stock exchange -

 16.1 The Committee is of the view that the company, intending to offer securities to the public  for subscription by the issue of prospectus, should be at liberty to make an application for listing to any of the recognised stock exchanges and it should not be necessary for the applicant to have the securities listed with the regional stock exchange also.

16.2 Clause 64(1B) be amended by omitting the word `regional" from line 3 and line 4 thereof.

16.3 Clause 64(2) be amended so as to substitute a period of 30 days in place of the words "10 weeks". Period of ten weeks for listing of securities with stock exchange is too long and goes against the interest of the investors who receive the refund at a later date and after a longer lapse of time.

16.4 Refund of subscription amounts on listing being refused - Clause 64(4) be amended so as to delete the words "without interest" and so as to provide "alongwith interest at such rate as may be prescribed from the date of closing of subscription list until the amount is refunded."

16.5 Sub-clause (4A) be incorporated after sub-clause (4) of Clause 64 - .

In default, the company and the directors incharge shall be punishable with fine at the rate of Rs.1,000/- per day from the date of default till payment."

16.6 Sub-clause (5) of clause 64 be amended on the same lines as sub-clause (4) so as to provide liability to refund the amount with interest from the date of the closing of the subscription till refund is made and so as to prescribe penalty / fine of Rs.1,000/- per day in the event of the amount being no refunded.

16.7 Clause 64 (6) be amended on the same lines in conformity with recommendation of the Committee pertaining to clause 64 (7).

16.8 The last part of sub-clause (7) of clause 64 be revised so as to provide that the company and the defaulting directors shall be punishable with fine of Rs.1,000/- per day from the date of default. In case the amount refundable is not repaid within a period of 6 months from the date of amount becoming refundable, the company and the directors in charge shall be punishable also with imprisonment which shall not be less than 6 months but which may be extended to 5 years.

17. Clause 66 - Power to pay certain commissions and prohibition of payment of all other commissions and discounts -

17.1 Clause 66(1) may be amended so as to add the following at the end of the said sub-clause.

Provided a copy of the contract for the payment of commission is delivered to the registrar and SEBI at the time of delivery of prospectus.

18. Clause 68 - Power of company to purchase its own securities - 

The provisions concerning buy-back have raised many issues. Following suggestions are made by the Committee in this behalf.

18.1 Clause 68(1) be amended by deleting the following words from 4th and 5th line of the said clause.

" Or proceeds of the prior issue made specifically for the purpose of buy back under this section". The company should not be permitted to make an issue for purpose of buy- back and then utilise the proceeds of the buy back for purchase of shares.

18.2 The committee is also of the view that provisions relating to the Buy Back should be restricted to purchase of shares only. The amounts required are to be bought out of free reserves and securities premium account. The marginal note of the clause 68 be changed as under :-

"Approval of company to purchase its own shares"

18.3 The expression "all other specified securities" to be deleted from 3rd line of Clause 68(1).

18.4 The explanation appended to clause 68(1) of the working draft be deleted as it is unnecessary.

18.5 Consequential amendments may be made in the other sub clause of clause 68 by substituting the word expression "shares" for the expression "securities". It may be stated in the passing that reference to ‘Employee Stock Option’ in context of the preceeding expression ‘Specified Securities’, is confusing. The explanation appended to the clause, contemplates conferring of voting rights in favour of the holders of ‘Specified Securities’ other than shares. No voting rights can be conferred on holders of securities other than ‘Shares’.

18.6 Clause 68(2) of the Working Draft may be restructured as under:

 "(2) - The company shall exercise the right to buy back the shares by first making an offer to all the existing securities holders on proportionate basis by issuing a circular to all the existing security holders giving them an option to sell the securities held by them to the company on the terms set out in the circular on a proportionate basis. Such an offer shall be kept open for a period of 30 days from the issue of the circular."

18.7 A new sub-clause 68(2)(A) of the Working group may be added.

  "2A. In event of the existing securities holders or some of them not responding to the offer so made within the time stipulated, the company may exercise its option to buy back this shares.

(i) from the open market; or

(ii) from the odd lots, i.e. to say whether securities of listed public company is smaller than such market lot as may be specified by the stock exchange; or

(iii) through negotiations or other arrangements subject to the conditions no votes are cast in offer of special resolution refer to 2 (a) by sub clause (1) or proposed to be provided by such negotiations or other arrangements.

(iv) by purchasing securities issued to employees of the company pursuant to the scheme stock option.

The report of Working Group clearly provided that the company may be entitled to and buy back the shares by using required moneys from ‘free reserves’ and share premium account. In the report of the Working Group, no reference is to be found by the company purchasing its own shares "from a prior issue made specifically for the purpose of buy back and rightly so".
 

 18.8 Sub-clause (4)(a) to be added after sub-clause (4) of clause 68 of the Working draft so as to provide for basis and procedure to be followed in respect of re-issue of shares as under:-

"If the company proposes to reissue such shares as provided in sub-clause (4), it shall make an offer of such reissued shares to the existing shareholders on a proportionate basis by issuing a circular giving 30 days time to the shareholders who are interested in exercising the option to subscribe to the reissued shares unless special resolution is passed by the company providing some other method of disposal.

18.9 Second proviso to sub-clause (4) of clause 68 of the Working draft may be recast as under:-

"Provided further that no bought back shares shall qualify for any voting or dividend rights at any time before they are reissued.

18.10 Penal provisions contained in clause 68(8) of the Working draft- The Committee is of the view that the said clause suffers from lacuna in so far as it does not deal with the situation where the declaration of solvency contemplated to be made under sub-clause (3) is found to be untrue. The penalty prescribed by the special provision also appears to be inadequate. The said clause may be recast as under:

"(8) If a company makes a default in complying with the provisions of this section or any rules made thereunder or the declaration of solvency is found to be incorrect, or the company becomes insolvent within a period of one year of the date of declaration, the company or the directors who have signed the declaration of solvency or any other officer of the company who is in default, shall be punishable with fine which may extend to Rs.10 lakhs and in such an eventuality the directors who have signed the declaration and officers in default shall be punishable also with imprisonment for a term which shall not be less than 2 years and which may extend to 5 years.

Provided that no directors shall be liable for penal consequences incase the company has become insolvent as a result of supervening circumstances beyond the control of the company or the directors.
 

 19. Clause 70 - Power to issue shares at a discount -

19.1 Clause 70 of the working draft deals with the subject matter "power to issue shares at a discount." The committee is of the view that the words "and sanctioned by the Company Law Tribunal" be deleted from the later part of the sub-clause (2)(i) of clause 70.

The company should be allowed to issue shares at a discount if they have the requisite consent of the shareholders in form of "Special Resolution". The Company Law Tribunal is a quasi judicial body and only disputed question or question of law should be referred to them.

19.2 In view of the above clause, consequential amendments be made by deleting reference to Company Law Tribunal from clause 70(2)(iv). Clause 70(3) of the Working draft be deleted as unnecessary. Clauses 70(4) and (5) of the Working draft be renumbered.

20. Clause 73 -   Further Issue of Capital -

20.1 Clause 73(7) of the Working Draft may be amended by omitting the words " at the prevailing market rate " from line 2 thereof and by substitution of the following :

"at the price which may be determined in conformity with the rules and the guidelines which may be made or issued as contemplated under sub-clause (9) of Clause 73 ".
  20.2 The Committee is of the view that the Company need not necessarily charge prevailing market price while conferring option on the employees of the company to acquire its securities. It is much better if this aspects are left to the discretion of the rule making authority. i.e. the Central Government or the SEBI.

20.3 Clause 73(10) of the Working Draft may be amended by inserting the following proviso :

"Provided that the terms of issue of such debentures or the terms of such loans included the term provide for such options and such term has been approved by a special resolution passed by a company in general meeting before the issue of debentures or the raising of the loans except in a case where the debentures are issued to or loans are obtained from the Government or any public financial institution ".
   20.4 Clause 73(3) of the Working Draft may be amended so as to read as under : "(3) Where further shares are offered to the members under sub-clause (i) or to any other person at a premium, the amount of minimum premium charged shall be approved by the company by a special resolution ".
  20.5 Proviso appended to Clause 73(4) of the Working Draft may be amended so as to read as under : "Provided that no votes are cast in favour of the special resolution referred to in Clause (i) by any person to whom shares are proposed to be offered or any other shareholder who is directly or indirectly interested in the proposed offeree ".
  21. Clause 74 - Nature of Shares, etc. and Nomination -

21.1 Clause 74(2) of the Working Draft makes a beneficial provision entitling the holder of shares or debentures to make nominations in respect of shares in or debentures of a company. There is no reason as to why this facility should not be extended to the holders of other securities.

21.2 The Committee is of the view that Clause 74(2) of the Working Draft may be amended as under :
 

"(2)Every holder of shares in, or holder of debentures of, or any other security of a company may, at any time nominate, in the prescribed manner, a person to acquire his shares in, or debentures of or other security in whom it shall vest in the event of his death ". The incorporation of this clause will enable the companies to offer nomination facilities in case of issuing of any security.

21.3 Proviso appended to sub-clause (6) of Clause 74 be amended as under :

The proviso to sub-clause (6) of clause 74 provides that nothing in this section shall apply to shares held with the Depository. As a result of this proviso nomination facilities within Depository may not be available.

The proviso is intended to be made applicable only to sub-clause (6). The language used in the said proviso appears to be somewhat faulty. The Committee, therefore, suggests the above amendment .
 

"Provided that nothing in this sub-section shall apply to the shares held with a depository ".
  22. Clause 75 - Certificate of Shares - Issue of Duplicate Shares Certificates: 22.1 The Working Bill does not contain a provision specifying the time within which the duplicate shares have to be issued. It is therefore suggested that sub-clause (2A) be incorporated in Clause 75 of the Working Draft after sub-clause (2) thereof so as to read as under :   "(2A) The companies shall be bound to issue the duplicate shares certificates within 6 weeks of the complying of the conditions prescribed under sub-clause (2) and sub-clause (4) hereof and forwards such duplicate certificates to the applicant forthwith thereafter ".
  22.2 Penalty for contravention or non-compliance of the provisions pertaining to issue of duplicate certificates or shares -
The Committee is of the view that the provisions contained in sub-clause (3) of Clause 75 are inadequate. The Committee suggests the following amendment :

 Sub-Clause (3) of Clause 75 of the Working Draft be revised as under :

"(3) If a company issues a duplicate certificate with intent to default or in collusion with the applicant, it shall be punishable with fine which may extend to 5 lakh rupees. If the directors of the officers of the company are a party to such fraud or collusion, the directors or officers in default shall be punishable with imprisonment which shall not be less than two years and which may extent to five years and are also liable to pay fine which may extend 5 lakh rupees.

22.3 There is no provision whereby non-issuance of duplicate certificates or obtaining duplicate certificates on false representation is made an offence. The following amendments are therefore suggested:

" (3A) If the applicant obtains a duplicate shares certificate from the company by making representations which were false to his knowledge when made, such person shall be punishable with imprisonment with a term which may extend to 3 years or with fine which may extend to 1 lakh rupees or with both ".

22.4 "(3B) If the company fails and neglects to issue the duplicate certificate within a period six weeks as provided in sub-clause (2A) above, a company and its directors or other officers in default may be fined upto Rupees 1,000/- per day until the default continues.

22.5 Printing of share certificates - The Committee has received large number of representations from several associations and knowledgeable members of the public that the share certificates should be required to be printed at the press which may be approved by SEBI, on quality paper to deal with the problem of fake certificate. It has been rightly suggested by some of the associations that the procedure followed by London Stock Exchange may be prescribed and the device of using holograms, etc. be followed:

The Committee is of the view that sub-clause 1A be incorporated in clause 75 of the Working draft so as to read as under:-

"(1A) The certificate of shares or securities to be issued by the company shall be got printed at the printing press which may be approved by SEBI and shall be in conformity with all other requirements which may be prescribed by SEBI by its regulations.

23. Clause 94 - Transfer not to be registered except on production of instrument of transfer

23.1 Committee has received several representations to the effect that the time has come to stop "blank transfers" altogether. If the transactions in the market are allowed to be effected on the basis of blank transfer deeds executed only by the introducing member, there is possibility of several bonafide purchasers being defrauded and the fraud being not detected for a long time. In U.K., transfers are allowed only by registered certificate holders. Any investor can deliver only those securities which are registered in his name. Sometimes, in India, the name of the ultimate purchaser is filled in the transfer deed after the death of the introducing member. If the company refuses to transfer such shares to the name of ultimate purchaser on the ground that the share certificate is forged or that the transfer deed is not signed by the member of the company, serious complications arise and at times the ultimate bonafide purchaser is left with no remedy at all.

23.2Perhaps, the only justification for permitting trading in blank transfer deeds is the levy of stamp duty which will have to be paid on the affixation of the transfer deed being completed by filling up the name of the proposed transferee. The Committee is strongly of the view that the transfer deeds in respect of transfer of securities, etc. should also be exempted from payment of stamp duty to the same extent and in the same manner as the transfer of shares held in a depository are exempted.

23.3If this suggestion is not acceptable to the Central Government for some reason, stamp duty may be levied only at the stage of issue of shares and not at the stage of transfer of shares. In U.K., the shares are transferred within 3 to 4 days from the date of the share certificates being lodged with the company and the transfer of securities is approved by the registrar and not by the Board of Directors. If there is any alleged discrepancy, the company may make a reference to the transferor and serve notice on the transferor to the effect that shares or the securities shall be transferred unless objection to the contrary is received from the transferor within the stipulated time.

 23.4 Alternative Recommendation - Section 108 of the Companies Act deals with the subject matter of transfer of securities. Pursuant to the recommendation of the Vivian Bose Commission of Inquiry, sub-sections (1A), to (1C) were inserted in section 108 of the Companies Act, 1956, prescribing the mode and manner as well as the period of currency during which the blank transfers may operate. From the report of the Working group, it appears that no suggestion was made for omitting sub-clauses (1A) to sub-clause (1C) from section 108 of the Act. From the Working draft it appears that these provisions are also omitted so as to remove all curbs on blank transfers. The Committee is of the view that if the blank transfers are to be allowed and not to be banned, nevertheless, there should be restrictions on use of blank transfer deeds as broadly indicated hereinafter. It is not in public interest that blank transfers are allowed to be circulated in market without any restriction.

23.5 The Committee is of the view that sub-clause (1A) be incorporated in clause 94 of the Working draft so as to read as under:

"(1A) Every instrument of transfer of shares shall be in such form as may be prescribed, and

(a) every such form shall, before it is signed by or on behalf of the transferor and before any entry is made therein, be presented to the authorised officer of the recognised stock exchange, in case of shares of a listed company, who shall stamp or endorse thereon the date on which it is so presented, and

(b) in all other cases, every instrument of transfer in the prescribed form with the date of such presentation stamped or otherwise endorsed thereon shall after it is executed by or on behalf of the transferor or transferee and completed in all other respects, be delivered to the company within 90 days from the date endorsed on such instrument. In case of shares of unlisted public companies, every such instrument of transfer of shares or securities shall be dated by the introducing members himself immediately on the transaction being concluded and the instrument of transfer duly executed by or on behalf of the transferor or transferee and completed in all other respects by delivery to the company within 90 days from the date of such instrument.

(c) in both cases, the period of book closure shall be excluded for the purpose of computation of the period of 90 days.

24. Clause 98 - Rectification of register of transfers - 

  24.1 The Committee is of the opinion that the proviso to sub-clause (2) of clause 98 be substituted in place of the proviso to the said sub-section provided in the Working draft. Section 111A (2) of the existing Act provides that subject to the provisions of the said section, the shares or debentures and any interest thereon of a company shall be freely transferable. By the Depositories Act 1996, section 22A of the Securities Contracts (Regulation) Act, 1956 was omitted with effect from September 20, 1995. By subsequent legislation known as the Depositories related laws (Amendment) Act, 1997 it was provided that the transfer of shares could be refused by the company for a sufficient cause. The Committee is of the opinion that the expression `sufficient cause’ is wider than the scope and ambit of old section 22A of the Securities Contracts (Regulation) Act 1956 which was rightly omitted by the Depositories Act, 1996. Shares of public limited companies should be normally freely transferable and therefore this clause requires amendment. Section 111A (2) of the Act was a retrograde step. No public company should be entitled to refuse transfer of securities for so called "sufficient cause".   24.2 The Committee is of the view that the company should be entitled to refuse registration of transfer or transmission of shares or debentures only on the ground that the proposed transfer of shares or debentures would contravene the provisions of the SEBI Act, 1992 or the regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 or re-enactment thereof or any other law or statutory guidelines having the force of law which may be in force at the relevant time. The Committee is of the view that the company should not be entitled to refuse transfer or transmission of shares on any other ground. The Committee is also of the view that the time has come to reduce the period during which the transfer should be effected. In U.K., the transfer is effected within 3 to 4 days. The Committee has reached the conclusion that at the most the company may have one month’s time for the purpose aforesaid.   24.3 In the light of the above, the following amendments are recommended:- "Proviso to sub-clause (2) of clause 98 be substituted as under:

"Provided that the company shall be entitled to refuse registration of transfer or transmission of shares or debentures within one month from the date on which the instrument of transfer or intimation of transmission, as the case may be, is delivered to the company, only, on the ground that the proposed transfer of shares or debentures if permitted would contravene the provisions of SEBI Act, 1992 or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 or any other law for the time being in force;

If the company refuses or neglects or omits to transfer or transmit the shares on the above referred ground within the time as aforesaid, the party aggrieved may appeal to the Company Law Board within two months from the communication of such impugned order or decision by the company to the transferor or the transferee within two months from expiry of the date by which company is obliged to transfer the shares and securities as aforesaid;

In cases where such refusal was effected during the period September 20, 1995 upto January 14, 1997, the `party aggrieved’ may file an appeal before the Company Law Tribunal within three months from the date of the Amending Act herein coming into force.

In all other cases, the Company shall effect transfer or transmission of shares or debentures latest within one month from receipt of instrument of transfer or written intimation seeking transmission of shares and return back the shares certificates duly transferred forthwith thereafter without any delay.

 24.4 Sub-section 3A be inserted in clause 98 to read as under: "(3A) The amending provisions herein shall be deemed to have come into force with effect from September 20, 1995."

Nothing contained in the above referred proviso shall apply to the securities held by the Depository in a dematerialised form.

24.5 The Committee is of the view that the Reserve Bank of India should have a locus standii to make an application to the Company Law Tribunal for rectification of register of transfer in respect of banking companies on the ground that such transfer is effected in contravention of the provisions of the Reserve Bank of India Act, 1934 or the Banking Regulation Act, 1949 or the statutory directions or statutory orders or circulars issued by the Reserve Bank of India in exercise of its statutory powers having force of law.

Clause 98(3) of the Working draft may be amended by adding the words "the Reserve Bank of India" immediately after the words "or the Securities and Exchange Board " in the second line of the said proviso.

24.6 The Committee is of the view that the following explanation be added at the foot of sub-clause (3) of clause 98 so as to read as under:-

Explanation: The expression "any other law for the time being in force" used in sub-clause (3) hereof as well as the proviso appended to sub-clause (2) hereof shall mean and include Acts, rules, regulations, orders or statutory directions.

24.7 Sub-clause (4A) be incorporated in clause 98 of the Working draft so as to read as under:-

"Notwithstanding anything contained in other provisions of the Act or any other law, Reserve Bank of India shall have power to direct freezing of voting rights in respect of shares of banking companies pending consideration of application for transfer if it prima-facie appears to the Reserve Bank that the proposed transfer if sanctioned would contravene the Banking Regulation Act, 1949 or the Statutory guidelines or circulars issued by the Reserve Bank and for such further period as it deems fit."

24.8 Sub-clause (5) of clause 98 of the Working draft be amended so as to add the following words at the end of the said sub-clause.

"Or by any order of the Reserve Bank of India pending consideration of application for transfer of shares of banking companies as contemplated under sub-clause (4A) hereof."

 25. Clause 99A - Proposed Verification of signature on the instrument of transfer on payment of nominal fee - Clause 99A be incorporated in the Working draft of the Companies Bill so as to read as under:

"If a company receives an application or letter of request from its shareholders or any likely investors to verify the signature of the transferor on the transfer deed, the company shall be obliged to verify the signature of the transferor appearing on the instrument of transfer and forwarding back the instrument of transfer alongwith the certificate of verification within 2 weeks of the receipt of any application or letter of request on payment of such fee as the company may decide to charge not exceeding Rs.50/-. In default, the company and officers in default shall be punishable with fine of Rs.500/- per day till the default continues.
  1. Clause 100 - Limitation of time for issue of certificate
    1. The Committee is of the view that the company should be required to issue certificate of shares soon after the allotment of shares and effect transfer maximum within one month from the relevant date.
The incorporation of this clause will be in the interest of investors and will enable the investors to get their certificates within one time of allotment.  26.2 Clause 100 of the Working draft may be amended as under:

"100. Limitation of time for issue of certificate - (1) Every company, unless prohibited by an order of any Court or Tribunal shall within one month after the allotment of any of its shares, debentures or debenture stock and within one month after the application for registration of transfer of any such shares, debentures or debentures stock is received, delivered, in accordance with the procedure prescribed by this Act, the certificate of all the shares, debentures and certificates of debenture stocks, duly allotted or transferred within any default whatsoever. In case the company is prohibited from the transferring its shares, debentures or debenture stocks by an order of the Court or Tribunal the company shall be bound to forward a true copy of such order of the Court or Tribunal to the applicant concerned soon after the receipt of application for registration of transfer and as soon as such an order is served on the company, the company shall be bound to appear before the Court or Tribunal and make best possible efforts to get the stay order vacated by making necessary legal representations before the Court or the Tribunal.

26.3 Penal clause contained in sub-clause (2) of clause 100 of the Working draft - The Committee is of the view that the following sentence be added at the end of the above referred sub-clause
 

"The Court may direct that part of the amount of fine which may be realised shall be paid to the allottee or the transferee concerned." The incorporation of this clause will enable the investors to get compensation / damages / interest.

26.4 Sub-clause (2A) be incorporated in the said proviso after clause (2) thereof.

"Sub-clause (2A) - Notwithstanding the above, the party aggrieved shall be entitled to adopt independent proceedings for the payment of compensation for loss suffered by him or it as a result of delay caused by the company in not issuing the requisite certificate."

The incorporation of this clause will enable the investors to get compensation / damages / interest.

27. Clause 141 - Voting and Demand for Poll -

 27.1 The Committee is of the view that it is in the interest of corporate democracy that the shareholders should be allowed to participate through postal ballot. Several matters of consideration pertaining to issue of shares, etc. are required to be decided by the company at its Extra-Ordinary General meeting by passing of a special resolution. By and large it is utmost important for the shareholders to remain personally present at these meetings as the shareholders are spread over through out the country.

27.2 Sub-clause (1A) be incorporated in Clause 141 of the Working Draft so as to read as under :

"(1A) At any General meeting where a special resolution is proposed, the shareholders concerned entitled to vote at the meeting personally or by resorting to the method of postal ballot in respect whereof the requisite procedure shall be prescribed by rules".

27.3 The votes cast by postal ballot shall be treated on par as the votes cast by showof hands if a resolution is passed by a show of hands. Where a poll is demanded at the meeting, the votes cast by postal ballot shall be counted on the same basis as the votes cast in the poll.

By incorporation of this clause investors can vote without having to attend the meeting and details can be provided in the rules.

 28. Clause 163 - Right to Dividend, Rights Shares, Bonus Shares to be held in abeyance pending registration of transfer of shares - 

28.1 It is observed that when a company returns transfer deeds under objection, they do not keep dividend, etc. in abeyance as transfer deeds returned under objection are not treated as cases pending transfers. This causes hardships to the transferee who has to acquire the rights from the transferor who may have no incentive to do so.

28.2  The opening part of the above-referred provision be amended so as to read as under :

 "Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company or whether the company has returned back the instrument of transfer to the applicant concerned for rectification thereof or where the application for transfer of shares are returned under objection and the issue of registration of transfer of shares is still pending, it shall, notwithstanding anything contained in any of the provisions of this Act.

Sub-clauses (a), (b),(c) and (d) shall remain the same.
 

 29. Clause 164 - Interest and Penalty for failure to pay dividends within 30 days

The Committee is of the view that if the dividends declared by the company has not been paid or the dividend has not been posted within 30 days from the date of declaration the company should be made liable to pay interest and the dividend amount with interest at the rate of 18% per annum from the date of expiry of 30 days till payment. In all such cases, the company and the directors at fault should be punishable with daily fine for continuing default at the rate of rupees 1000 per day till the default is rectified. As regards the period of imprisonment prescribed under the above-referred clause, it should be provided that the defaulting directors shall be punishable with imprisonment for a term which may extend to 5 years and the minimum period of imprisonment to the extent of 5 years.

30. Clause 167 - Inspection of Books of Accounts of Companies -

SEBI should have power to inspect the books of accounts, records, etc. of a listed company in respect of matter relating to capital market. Clause 167(1) be amended by adding sub-items (iii) after sub-item (ii) as under:-

An officer of SEBI as is authorised by Chairman of SEBI in this behalf in case of listed companies.

This clause will enable SEBI to inspect books of listed companies in respect of public issue, transfer and issue of shares, etc.

31. Clause 193A of the Working Draft - Securities Audit - (Proposed)

The Committee has received large number of representations to the effect that the security audit be made compulsory. A suitable provision be made in the proposed Companies Act. The Committee is of the view that the said representation deserves to be accepted. Clause 193 of the Working Draft provide audit of cost account. The Committee is of the view that Clause 193(A) be incorporated in the Bill so as to provide compulsory securities audit every year by company secretary in practice so as to cover the specific aspects in relation to subjects pertaining to the Capital market as may be prescribed.

32. Clause 225 - Disqualification of Directors -

Clause 225(1) be amended so as to provide that if a person has been found guilty of contravention of the provisions of SEBI Act,1992 or Rules and Regulations made thereunder or is penalised for fraudulent or manipulation practices or any other wrongful act by an order passed under SEBI Act or by an Adjudication Officer under the provisions of SEBI Act,1992 and a period of 3 years has not elapsed from such eventuality.

33. Clause 229 - Vacation of Office by Directors -

The ground of disqualification as set out in sub-clause (4) of Clause 225(1) of the Working Draft as modified may also be incorporated in Clause 229 of the Bill soon after sub-clause (k) of Clause 229(1) of the Working Draft.

34. Clause 272 - Purchase of Minority Shareholding -

The clause deals with acquisition of shares by an acquirer or persons acting in concert and the price at which the same is to be acquired. The Committee is of the view that the substantial acquisition of shares in the secondary market of a listed company is governed by SEBI ( Substantial Acquisition of Shares and Takeover ) Regulations,1997 and therefore purchase of minority shareholding be left to be governed by the said regulation. It is suggested that the said clause 272 should therefore be deleted from the Working Draft of the Companies Bill.

35. Clause 422 - The Tribunal to hear all matters arising under the Act -

35.1 The clause 422 provides that the Company Law Tribunal hear any dispute arising out of any provisions of this Act or with respect to any matter dealt with in this Act.

35.2  The report to the said bill, inter alia, provides that in cases of takeovers, SEBI will have a right to be heard in all matters of takeovers of listed public companies.

The above provision is in conflict with Section 20 of SEBI Act,1992.

35.3 SEBI has jurisdiction to deal with any matters pertaining to substantial acquisition of shares and takeover of listed companies. The said matter should not come within the purview of Company Law Tribunal. Neither any Civil Court nor the company nor the Tribunal shall have jurisdiction to entertain and try any jurisdiction arising out of the SEBI Takeover Code.

35.4 It is suggested that a proviso be added to Clause 422 as under:-

"Provided that the Company Law Tribunal shall not have any jurisdiction in the matters which are governed by SEBI Act and SC(R) Act."

36. Clause 429 - Offences under Act to be made cognisable only on complaint by Registrar, shareholder or the Government -

36.1 It is suggested that SEBI should have also power to file complaint for the provisions pertaining to the capital market. It is, therefore, suggested that the word " Securities and Exchange Board " be inserted in sub-clause (1) as under :

"(1) No Court, Company Law Tribunal or the Regional Director shall take cognizance of any offence under this Act (other than an offence with respect to which proceedings are instituted under section 375), which is alleged to have been committed by any company or any officer thereof, except on the complaint in writing of the Registrar, Securities and Exchange Board, or of a shareholder of a company, or of a person authorised by the Central Government in that behalf".

36.2 An officer of SEBI should also be exempted from personal attendance under sub-clause (2). It is, therefore, suggested that sub-clause (2) shall be amended as under :

"(2) Notwithstanding anything contained in the Code of Criminal Procedure,1973, where the complainant under sub-section (1) is the Registrar or Securities Exchange Board or a person authorised by the Central Government, the personal attendance of the complainant or their officers before the Court, Company Law Tribunal or the Regional Director trying the offence shall not be necessary, unless the Court, Company Law Tribunal or the Regional Director for reasons to be recorded in writing requires his personal attendance at the trial ".

36.3 A suitable provision be made for imposition of monetary penalty for the offences pertaining to the capital market. Prosecution or penal fines is not the answer to all capital market violations. In capital market monetary civil fines can be equally deterrent for some offence.

36.4 The provision for awarding damages, compensation or interest to the shareholders or the applicants should also be made in the Bill. Presently, there is no provision whereby investors can claim damages, compensation, etc. for delayed receipt or certificates, refunds, interest warrants. In the capital market an appropriate remedy for the investor would be receipt of compensation, damages.

36.5 Provisions should also be made in the Bill for disgorgement of ill-gotten gains by the company and its directors by violating any provisions of the Companies Bill.

36.6 It is suggested that the mater of payment of stamp duty on issuance and transfers of shares / debentures be pursued with the Central Government / State Government in order to delete the requirement of payment of stamp duty on same.

 41. It is suggested that the provisions of Companies Act be made non-applicable to stock exchanges which are regulated by a special statute i.e. Securities and Contracts (Regulation) Act and SEBI Act.
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