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Emerging trends in Company law by Vinod Kothari1 Company Law: Recent trends in India and Abroad Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700.

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Presentation on theme: "Emerging trends in Company law by Vinod Kothari1 Company Law: Recent trends in India and Abroad Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta 700."— Presentation transcript:

1 Emerging trends in Company law by Vinod Kothari1 Company Law: Recent trends in India and Abroad Vinod Kothari 1012 Krishna 224 AJC Bose Road Calcutta India Phone / / / / Fax:

2 Recent Global trends in Company law by Vinod Kothari 2 Relevance of corporate law on enterprise Company law is directly related to enterprise: it can either promote it or hold it Most enterprise is corporatised: corporate regulation has a huge impact on the economy

3 Recent Global trends in Company law by Vinod Kothari 3 Sources of modern corporate law Company law in the commonwealth (UK, Australia, Hong Kong, Singapore, India, Malaysia) has common sources and influences Common features also in European Union, US laws UK Companies Act 1948 is the great mother of most corporate laws world over: but has undergone several changes over time: 1947 Cohen Committee report consolidated existing law in 1948 Act Jenkins Committee report introduced changes in 1967 Several changes upto 1985 based on EEC Directives New law in 1985 (747 sections and 25 schedules) The new law changed substantially by Insolvency Act 1985 (later replaced by Insolvency Act 1986) (provisions on insolvency separated), Financial Services Act 1986 (provisions on securities regulation separated) and Companies Act 1989 New Bill prepared in 2002 much smaller: 225 sections and 4 schedule

4 Recent Global trends in Company law by Vinod Kothari 4 Australia: based on UK law, but major changes in 1998 UK Companies Act, 1948 is the great mother of most corporate laws Canada: more than 25 years ago, split its base from UK laws and is New Zealand: in 1990 started drifting towards US laws United States: each state has its own law; Model Business Corporations Act 1984 South Africa: mixed influence of UK and Roman Dutch laws Singapore and Hong Kong: primarily based on UK laws; Hong Kong reviewed its law in 1999 Indian subcontinent Inspired by UK law

5 Recent Global trends in Company law by Vinod Kothari 5 Corporate law reforms Commercial law as a whole has been subjected to globalisation: Most commercial problems are no more domestic problems Todays corporate laws cannot take a domestic approach: Global trade has created the multi-jurisdictional enterprise Leading to greater international interdependence Global convergence of corporate laws: Securities laws have been more intensively internationalised Company law is still largely a domestic issue UK reforms: The Department of Trade and Industry, UK started a company law review process in March 1998: Scathing criticism by leading commentators as LCB Gower, LS Sealy, Law Society EU reforms: High level Group of Company Law Experts set up in Sept 2001 and public comments were received. These have now been synthesized and presented in Nov 2003

6 Recent Global trends in Company law by Vinod Kothari 6 The outer periphery of company law A key question before modern company law is what all should the law deal with? Incorporation and regulation of companies Issuance of securities by companies: shifted to legislation dealing with securities regulation: Perhaps a legacy of the US, where corporations law are a state subject and securities law a Federal subject Winding up and insolvency of companies: shifted to legislation dealing with insolvency laws Registration and enforcement of security interests on corporate assets: shifted to laws relating to enforcement of security interests on personal property Types of companies to regulate: Quoted companies Public companies Private companies

7 Recent Global trends in Company law by Vinod Kothari 7 Major company law reform exercises UK Companies Act: White paper issued in March 2005 Company Law Reform Bill presented to House of Lords on 1 st November, 2005 [Draft Bill preppared] Company Law Reform - Small Business Summary introduced into parliament on 1 st November, 2005 : summary sets out main elements of Bill affecting small business Company Law Reform Bill introduced to House of Commons on 24 th May, 2006 Company Law Reform Bill : Regulatory Impact Assessment – June, 2006 [An analysis done on cost of compliance v benefits associated from compliance] Company Law Reform Bill – Draft model articles for public companies – 6 th July, 2006 Notice of Amendments in Bill – 6 th July, 2006 EEC has finalised consultation process and may soon issue Directives US Company law: piecemeal approach, more of a firefighting Indian company law: which way is the reform heading?

8 Recent Global trends in Company law by Vinod Kothari 8 Special needs of small companies Current foundations of company law are inclined towards larger companies Todays reality: lots of small businesses which are individual enterprises are corporatised: The starting point of company law reform should be small companies Public versus private companies: Original UK legislation treated public companies as the residual form, and private companies only if they satisfied certain criteria In 1980, this structure was changed – private company now became the residual form Under the amended law, in either case, it is by mere declaration Single member corporations are already permitted by UK law: The concept was borrowed from US laws New amendments permit even public companies to be formed by single person Formation of companies: There will be no charter: companies to be formed based on a simple signed declaration at the time of formation: Constitutional documents required only if the company opts the same; different from model constitution appended to the law

9 Recent Global trends in Company law by Vinod Kothari 9 Objects clause and ultra vires dumped UK govt has accepted the suggestion to dump objects clause: Where required, objects clause may be there, but it will only have an internal effect Doctrine of indoor management also dropped: Provision inserted in law to say that the Board has full authority for all the powers of the company Has full authority to delegate This applies inspite of restrictions in the constitution Ultra vires doctine had been dropped long time ago under the European Communities Act 1972 Memorandum and articles to be merged into one Alteration of the constitution permitted with special resolution Companies may insert entrenching provision making alteration more difficult

10 Recent Global trends in Company law by Vinod Kothari 10 Capital maintenance Traditional foundations of law treat capital as the basis for limited liability: The Fourth EEC Directive required UK law to dump that concept and introduced concept of redeemable equity shares/ shares buyback (1981 amendment) The concept of authorised capital to be done away with The amendment continues with par value concept Also bars issuance of shares at a discount; capital payment for subscribing to shares: Such payment can be made out of distributable profits Public companies required to obtain a trading certificate: Trading certificate to be given if the intended initial capital obtained Reduction of capital permitted with mere solvency statement, and not court approval: No restrictions on private companies Public companies – public notification required; creditors have a right to move to Court Funding by private companies for their own shares to be permitted

11 Recent Global trends in Company law by Vinod Kothari 11 Decision-making by shareholders UK Companies Act in 1989 allowed private companies opt out of annual general meetings Also allowed companies to ascertain the sense of the members without a meeting: Common law rule of unanimous consent has always existed Amendment Bill proposes to dispense with annual general meetings altogether for private companies: Approval of accounts, appointment of auditors/directors dispensed with In case of public companies too, with unanimous consent, the company may opt out of AGMs Two sets of provisions: For private companies, the mandatory requirements (holding AGM and laying accounts) applicable only if opted in For public companies, mandatory requirements not applicable if opted out; Unanimous consent of all members at a meeting required Current draft law allows any member or auditor to requisition the meeting

12 Recent Global trends in Company law by Vinod Kothari 12 More reforms on meetings Written resolutions: Special set of provisions for ordinary and special resolutions in writing: 75% of the total voting strength or more than 50% of total voting strength Requires formal agreement – not voting is not treated as consent Proxies may be deposited in advance Demand for poll may be made before the meeting Proxies may speak at the meeting, and vote on a show of hands: Proxy has all the powers of the member in person Also has the power to demand a poll

13 Recent Global trends in Company law by Vinod Kothari 13 Rights of beneficial shareholders Companies would be permitted to recognise rights of beneficial interest holders

14 Recent Global trends in Company law by Vinod Kothari 14 Duties of directors Instead of relying on complex and inaccessible caselaw, the law will lay down significant duties of directors Schedule 2 lays down the general duties of directors: Broad principles of trust law and significant case law developed over time incorporated Directors duties to creditors: Duty to make contribution in certain cases Codification of civil remedies against directors

15 Recent Global trends in Company law by Vinod Kothari 15 Corporate directors Most of states in the US permit individual directors UK Companies Act permits corporate directors Australia, New Zealand, Singapore and Canada recently prohibited corporate directors France permits Company law reform in UK seeks to prohibit corporate directors

16 Recent Global trends in Company law by Vinod Kothari 16 Distribution of annual reports Law seeks to avoid sending of annual reports to debentureholders: This may be required under the terms of the debentures A new form of sending statements: website publication Law avoids sending of statements, if shareholders given web access: The option is to be exercised by the shareholder The shareholder is to be notified of the statement having been put on website

17 Recent Global trends in Company law by Vinod Kothari 17 Operating and financial review A new reporting requirement for operating and financial review to be applicable: major company based on certain financial parameters: turnover, balance sheet total and employees OFR is mandatory for all public companies OFR also required for private companies if the same are major companies: The monetary parameters are 10 times in case of private companies Apart from historical information, this also includes projections

18 Recent Global trends in Company law by Vinod Kothari 18 Corporate governance: the role of the independent director Derek Higgs committee recommendations in Jan 2003: role of non-executive directors No of board meetings and the attendance of individual directors should be reported in annual report Chairman and chief executive should not be the same person Non-executive directors must meet separately at least once in a year Non-executive directors should serve 2 3-year terms

19 Recent Global trends in Company law by Vinod Kothari 19 Company secretaries Realising that companies secretaries are not essential to corporate governance, the Bill allows private companies to opt out of keeping them.

20 Recent Global trends in Company law by Vinod Kothari 20 Offences Offences classified in 6 types: Type A: summary conviction, fine upto level 3 on standard scale Type B: summary conviction; fine upto level 5 Type C: on either indictment or summary conviction, fine upto statutory maximum Type D: Indictment: imprisonment upto 2 years or fine or both Summary conviction: imprisonment upto 6 months or fine or both Type E: Indictment: imprisonment upto 7 years or fine or both Summary conviction: imprisonment upto 6 months or both Type F: Indictment: imprisonment upto 10 years or fine or both Summary conviction: imprisonment upto 6 months or fine or both

21 Recent Global trends in Company law by Vinod Kothari 21 US corporations law : a different breed altogether The corporation in the US is much different from the joint stock company: The latter was a business association clothing itself with a corporate character US corporations emanated from chartered corporations, allowing people to form corporations under a general corporation law: Single member corporations are common No need for a contract among members Object of association, or Ultra vires have been been there

22 Recent Global trends in Company law by Vinod Kothari 22 The German model Germany has separate regulatory structure for public and private companies: AG is a German public company Minimum capital of DM GmbH is a German private company Single shareholder is possible Minimum capital of DMs Share certificates not required Incorporation of GmbH is very simple – single constitutional document Ultra vires rule is not applicable AG has two tier board structure: supervisory board and managerial board: The former is supposed to take care of shareholder and employee interests For AGs with more than 2000 employees, there will be equal participation

23 Recent Global trends in Company law by Vinod Kothari 23 The French model Two types of companies: Public companies Societe Anonyme (SA): Minimum 7 members; capital of FFs Public companies are required for investment and real estate businesses Private companies: separate law exists; called Societe a Responsabilite Limitee, or abbreviated as SARL: Maximum membership of 50 and minimum capital FFs Share certificates are not required: participation or book entry ownership is possible Single member companies, called EURL (Enterprise Unipersonnelle a Responsabilite Limite) Public companies are very common: approx SAs exist Board structures are mostly unitary with minimum 3 and maximum 12 directors

24 Recent Global trends in Company law by Vinod Kothari 24 Recommendations of the EU Group of Experts Types of companies: public and private company distinction is not relevant. Three main types exist today: Listed companies Open companies: whose shares can be traded Closed companies Corporate governance: Pre-meeting materials (notices, etc) to be put on companies websites Electronic voting or voting in absentia Obligation on the part of institutional shareholders to disclose their beneficial shareholdings and voting directions Rights of minority shareholders to apply for investigation Nomination, remuneration and audit committees Remuneration to be disclosed; shares and

25 Recent Global trends in Company law by Vinod Kothari 25 EU group recommendations: legal capital The relevance of legal capital as a protection to creditors and lenders put to question Shares without par values: Shares expressed as fractions of total capital Capital reduction: instead of all capital reductions to require protection, shareholders to be given right to apply for protection Buyback of shares by companies upto a distributable profits to be allowed: Financial assistance for purchase of self-shares should also be allowed upto distributable profits

26 Recent Global trends in Company law by Vinod Kothari 26 EU recommendations: Creditors protection Before distribution of dividends, directors should make a solvency statement: Balance sheet solvency Liquidity solvency Alternative regime of subordination of insiders claim has been recommended

27 Recent Global trends in Company law by Vinod Kothari 27 EU recommendations: restructuring and mobility Members to be given right to approach Court to seek protection in case of restructuring

28 Recent Global trends in Company law by Vinod Kothari 28 Company law reform in India: Naresh Chandra recommendations Private companies should have minimal regulations Sees a new class of companies called small private companies to which added exemptions to be allowed from the Act including a simplified exit scheme Either Paid up capital and free reserves upto Rs 50 lacs (this covers 93% of private companies) AND Turnover or other receipts upto Rs 5 crores OR SSI SPCs must have a single main object

29 Recent Global trends in Company law by Vinod Kothari29 JJ Irani Committee recommendations

30 Recent Global trends in Company law by Vinod Kothari30 Access to Capital

31 Recent Global trends in Company law by Vinod Kothari 31 Broad assessment Some bold thinking, international awareness, in tune with global efforts at company law rewriting However: Full of glib talk and statements of pious intentions: Examples: raising money fraudulently should be subject to strict penalty regime Companies should be allowed to raise capital so long as they provide true and correct information to investors and regulators The legal process associated with prosecution should be revisited so as to make such process more effective Baby may be thrown with bathwater Makes several recommendations which are already a part of the law: Disclosure requirements for deposits by advertisement: All that has been recommended already exists Provision similar to sec. 68 for fraudulent inducement to invest should be inserted for deposits: Actually, the definition of prospectus includes the invitation to deposits; hence, those provisions apply already Makes several recommendations which have been made over years, with no headway at all: Insurance of depositors: Has been made over years since Sachar Committee

32 Recent Global trends in Company law by Vinod Kothari 32 Streamlining Capital Issues Regulation Need for separate Financial Services regulation ruled: By itself, this is a very large, macro issue In UK, integration of financial sector supervision into the FSA is a model India still goes by separation of regulatory regime: These authorities have proliferated over time Harmonisation of activities of regulators: Core provisions on maintenance and management of capital, rights flowing from various types of capital may be left to the Companies Act: Details may be left for the securities regulator Avoid intrusive regulation so as not to revert to the Capital Issues Control regime More coordination between SEBI and the Department

33 Recent Global trends in Company law by Vinod Kothari 33 A complex web of regulation over financial services sector Financial sector Insurance services Banking & non-banking financial services Capital Market Services Pensions and OASIS Housing finance IRDASEBI PFRDA?NHB RBI

34 Recent Global trends in Company law by Vinod Kothari 34 Making capital issues faster, simpler Capital issues approval may be made faster with concept of deemed approval: Also in case of filing and registration of docs with the Registrar Dissemination of information: electronic media should be recognised Shelf prospectus: Currently has limited applicability: Only specified financial institutions (sec. 60A) can use it May be extended to other classes of companies Well-known Seasoned Issuers concept may be evolved: These companies file only a main document once a year, and then only make incremental changes US SEC practice recognises concept of WKSIs: Current in its filings and $ 700 mn of common equity or $1 bn of debt over last 3 years Several facilities were granted in 2005 reforms Except in case of debt issues (which are mostly unlisted), there is not much relevance of this concept in India; however, forward-looking Time taken in rights issues to be reduced Deemed public offers: recommends exemption to: Exemption to rights offers by unlisted companies: Concept of sec. 67 has been misinterpreted Issues of shares to employees by private companies: Private company meaning sec 3 (1) (iii) companies – question of more than 50 does not arise Issuance of shares to QIBs

35 Recent Global trends in Company law by Vinod Kothari 35 New forms of securities Tracking stocks: Stocks that derive dividends only from profits of a particular division: If this concept is to work, it can only work under the frame of Cellular Companies or protected cell companies Permitted in several countries : USA, Japan, Germany However, note: No tracking stocks issued since 2002; between 1984 to 2001, 38 issues came of which only 5 are trading now Treasury stocks: Companies buy back their shares but hold them as a part of their treasury Committee realises lots of preparatory steps are required to bring these changes into effect Many countries permit them: USA, Japan, Hong Kong, most EU countries, proposed in UK also Companies allowed to buyback shares: No dividends No voting rights Shares may be cancelled or reissued Target shares buyback: Buyback of shares on a preferential basis from a shareholder block: Negatively recommended by the Committee Permitted in many countries

36 Recent Global trends in Company law by Vinod Kothari 36 Preference shares Perpetual preference shares: Recommended Floating rate preference with a benchmark rate Call and put provisions may provide optionality to issuer/shareholder Arrears of Dividends on preference shares: Committee recommends, may be capitalised even if the company did not make profits: Erroneous concept, as dividends on preference shares are never guaranteed; the only concept of dividend is distribution of profit Ambiguity on arrears of preference shares Some rulings have held that preference dividend can be converted into equity on redemption: Mr A R Ramnathans rulings in Caledonian Jute, British India Corporation, etc

37 Recent Global trends in Company law by Vinod Kothari 37 Capital reduction May be made easier by transfer of powers to NCLT: Already enacted.

38 Recent Global trends in Company law by Vinod Kothari 38 Disclosure norms for capital issues Glib talk - there is a need for proper disclosure at every stage No detailing as to what is currently not disclosed that requires to be disclosed Shareholders should be informed about all material facts: Such as? Disclosure about shareholding controls, direct or indirect: If indirect is discrete, it can never be disclosed. If not discrete, it is hardly indirect Clause 49 requires control disclosures already

39 Recent Global trends in Company law by Vinod Kothari 39 Deposit taking Non-banking non-financial companies should be banned from accepting public deposits: This suggestion was considered and rejected by the Committee The committee, instead, recommends stricter norms for public deposits Facts: Public deposits by NBNCs is a rare practice: India is possibly the only example It was allowed as an adhoc measure way back in 1960s Public deposits are very costly - financial viability of a company may be severely affected by public deposits Public does not need it – savings are getting increasingly institutionalised. Public deposit has been grossly abused instrument over time – people have miserably lost money There is greater case than ever before in the past to ban public deposits completely Stricter norms recommended: Disclosure requirements: already there Credit rating – if a company has a good rating, there is no reason for it to access public deposit Cash Reserve requirements out of profits – liquidity requirement already there; cash reserve further increases the cost of public deposits Dispute resolution mechanism – the problem with public deposits is not dispute; it is default Need for bolstering confidence – it is not confidence but greed that drives people to put in money in deposits Provisions similar to sec 68 for fraudulently accepting public deposits – in fact, prosecution provisions for public deposits are much stricter than those for any other form of capital Suspension of further deposit taking in case of default – already exists Insurance of depositors – the matter has been discussed ever since 1975 with no resolution

40 Recent Global trends in Company law by Vinod Kothari 40 Registration of charges Makes only a tinkering suggestion: Documents requiring signature of both the lender and the borrower create difficulties In fact, more fundamental thinking is required here: Globally, there is a move for a completely independent system of registration of security interests: UK Law Commission has also recommended the same There is no reason why charges should be registered only in case of companies: Increasing use of non-corporate or JV form of businesses Registration of charges should be done by the lender, in the lenders own interest

41 Recent Global trends in Company law by Vinod Kothari 41 Issue of shares other than for cash Valuation of consideration by independent valuer: Difficult to understand the intent of this thought X Ltd buys property from Y, and issues shares This is issue of shares for non-cash consideration The committee is worried about this X Ltd buys property from Y, pays for the same in cash. Y subscribes to shares of X Ltd., pays for in cash This is NOT an issue of shares for non-cash consideration The Committee has no worries here – why? The fear on which this recommendation is founded is only results out of conflict of interest in related party transactions No reason to single out issue of shares for non-cash consideration Similar recommendation in case of transfer of assets by the company and receipt of consideration other than in cash

42 Recent Global trends in Company law by Vinod Kothari 42 Restrictions on inter-corporate loans and advances Observations relating to stock market scam – corporate funds diverted for price rigging Suggests prohibition on companies lending to stock brokers: Provides for special resolution for allowing to do so Detailed disclosure by a lending company on end- use of funds by the borrowing company Disclosures to be made in explanatory statement for seeking approval also to be laid down

43 Recent Global trends in Company law by Vinod Kothari 43 Preferential allotments SEBI-type regulations on preferential allotments in case of unlisted companies also recommended: Recommends valuation of shares Difficult to understand the genesis of this proposal: Preferential allotment by any public company requires special resolution If a special majority of shareholders approves of the action of the company, whose protection are we seeking? Valuation of shares of an unlisted company is itself most inefficient: Market value provides a transparent method of fair valuation There is no consistent or reliable method of valuation in case of unquoted shares

44 Recent Global trends in Company law by Vinod Kothari 44 Minimum subscription The law should permit retention of actual subscription even if minimum subscription not reached: Difficult to understand the suggestion; Minimum subscription is the minimal amount needed to accomplish the purpose for which the issue was made If the minimum subscription is not reached, where will be the issue funds be invested? The concept of minimum subscription has not been properly appreciated Partly to blame is mistaken understanding over time to equate the issue amount and the minimum subscription Sec 69 of the Companies Act expects the prospectus to mention the minimum subscription: Item 5 of Part I of Schedule 2 specifically lists out Since CCI regime, 90% of the issued amount has been taken as minimum subscription: The practice has no basis.

45 Recent Global trends in Company law by Vinod Kothari 45 Shares with differential voting rights Provisions were inserted but not effective Provisions should be retained – anomalies to be removed: Essentially, Companies Act envisaged years ago preference shares as non-voting shares Artificial restriction brought in Indian law to say – shares to be of only two classes This restriction may be done away with Instead, provision may be inserted to prevent management perpetuating control by issuing management shares In other words, curb shares with higher voting rights, than shares with lower or no voting rights

46 Recent Global trends in Company law by Vinod Kothari 46 Other provisions DRR to regulate creation of DRR by non- banking finance companies For other companies, flexibility to be ruled by the Central Government Deletion of sec. 208: No companies in the present times are using sec 208 at all But that is not the only provision in Companies Act which is deadwood

47 Recent Global trends in Company law by Vinod Kothari47 Minority rights

48 Recent Global trends in Company law by Vinod Kothari 48 Minority rights Elaborate paras in Chapter VI dealing with minority interests: Para 1 to 2.4 in essence seem to say nothing They only describe the existing provisions And say, new Act should bring in a reasonable framework for minority interest by bringing specific provisions Neither is there any suggestion that the exiting framework is not reasonable, or not specific Should minority directors/ directors by proportional representation be made mandatory: Committee favoured existing optionality Stringent disclosures for Companies accessing funds through public offers: Glib talk, as no discussion on what disclosures other than those required at present Board and management to be protected from undue/unjustified interference by minority: Again, no details Extensive use of postal voting and voting by electronic media

49 Recent Global trends in Company law by Vinod Kothari 49 Oppression and mismanagement, takeovers No recommendations at all Objections to a scheme of takeover, a limit to be prescribed for minimum shareholding: Courts preside over these matters; discretion of court should be reserved In case of takeover of 90% voting control, there must be an option to the 10% holder to sell their shares Fair valuation of shares of minority: By a valuer to be appointed by Tribunal A company that has delisted its shares should give a buyback offer with 3 years of delisting: Superfluous, as delisting procedures currently provide buyback offer before delisting

50 Recent Global trends in Company law by Vinod Kothari 50 Class action/ derivative law suits Suits by a shareholder on behalf of a company to be allowed Class action/ derivative suits are legally allowed in many countries: USA, Korea

51 Recent Global trends in Company law by Vinod Kothari51 MCA 21

52 Recent Global trends in Company law by Vinod Kothari 52 MCA 21 WHAT IS MCA-21? MCA-21 is an e-governance initiative that builds on the Government vision to introduce a service oriented approach in the design and delivery of Government services. OBJECTIVE OF MCA-21 To meet the expectation arising from globalisation Easy and secure access to MCA services To move from the traditional paper based operation to a near paperless environment Enable convenience for statutory compliance in a manner that best suits the stakeholders

53 Recent Global trends in Company law by Vinod Kothari 53 MCA 21 SCOPE Covers only the offices of ROCs, RDs and the HQs at New Delhi Does not include other offices of MCA like Official Liquidators, CLB/Tribunal and Court SERVICES AVAILABLE ON MCA 21 Registration and incorporation of new companies Filing of forms for change of names/address/ Directors details Registration and verification of charges Inspection of documents Application for various statutory services from MCA Investor grievance redressal

54 Recent Global trends in Company law by Vinod Kothari 54 MCA 21 – KEY BENEFITS On-line incorporation of companies Simplified and easy mode of filing of forms/returns Registration as well as verification of charges anytime and from anywhere Inspection of public documents anytime and from anywhere Total transparency through e-governance Building up a centralized database repository of corporate operations in India Timely redressal of investor grievance Availability of more time for MCA employees for qualitative analysis of corporate information

55 Recent Global trends in Company law by Vinod Kothari 55 MCA 21 – PRESS NOTES/CIRCULARS Press Note dated MCA 21 Handbook MCA 21 Initiation Guide DIN Process Document Frequently Asked Questions FAQs on DIN Proposed E-forms Instruction Kit Details of New forms and fees General Instruction kit for form filing in physical mode Guidelines to be followed during E-filing Scheme for Certified Filing Centres Bulletin form Banks/FIs for Operation under MCA 21

56 Recent Global trends in Company law by Vinod Kothari 56 MCA 21 – LEGISLATIVE CHANGES Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006 [Notification No. 56(E) dated Application of Section 159 to Foreign Companies (Amendment) Rules, 2006 [ Notification No. 132 (E), dated ] Companies (Disqualification of Directors under Section 274(1)(g) of the Companies Act, 1956) Amendment Rules, 2006 [ Notification No. 133(E), dated ] Companies (Declaration of Dividend Out of Reserves) Amendment Rules, 2006 [ Notification No. 134(E), dated ] Investor Education and Protection Fund (Awareness and Protection of Investors) Amendment Rules, 2006 [Notification No. 135(E), dated ] Companies (Amendment) Regulations, 2006 [ Notification No. 157(E), dated ] Companies (Appointment of Sole Agents) Amendment Rules, 2006 [ Notification No.147 (E), dated ] Cost Audit Report (Amendment) Rules, 2006 [ Notification No. 148 (E), dated ] The Companies (Amendment) Act, 2006 [ Notification No.

57 Recent Global trends in Company law by Vinod Kothari 57 COMPANIES (AMENDMENT) ACT, 2006 Act to come into force on the notified date – 1 st June 2006 as the effective date Section 253-A new proviso inserted making DIN Compulsory for directors DIN – New Section 266A to 266G inserted E-Filing – Section 610B and 610C inserted CG to provide Value Added Services – 610D IT Act applicable – 610E

58 Recent Global trends in Company law by Vinod Kothari 58 E-FILING MCA 21 project facilitates e-filing of forms and applications under the Companies Act, E-filing initiative started from Companies Amendment Act, 1960 by inserting Section 610A Also, Recommendation of J.J. Irani Committee for e-filing of documents adopted E-filing would include incorporation of new companies, filing annual and other statutory returns, registration and verification of charges and applying for various approvals/clearances Directors Identification Number (DIN) and Digital Signature Certificate (DSC) are pre-requisite under e-filing regime Companies Amendment Act, 2006 on E-filing: CG to make Rules for – Filing of applications, BS, Prospectus, Return, declaration, M&AOA, charges, etc in E-form Service or delivery of document, notice, communication or intimation in E- form Maintenance of Applications, BS, etc by Registrar in E Form

59 Recent Global trends in Company law by Vinod Kothari 59 E-FILING Inspection of documents through E Form Payments of Fees, Charges or other sums through E Form Registration of Documents/incorporation certificates, record/receive notice in E Form [Section 610B] CG may frame a scheme to facilitate the above [Section 610B] CG to notify that any provisions of Companies Act, 1956 be made inapplicable or made applicable in modified form to suit e-filing [Section 610C] Information Technology Act, 2000 to be made applicable in relation to electronic records [Section 610E] Companies (Central Government) General Rules and Forms, Companies (Declaration of Dividend out of Reserves) Rules etc. modified to make them compatible with e-filing

60 Recent Global trends in Company law by Vinod Kothari 60 DIRECTORS IDENTIFICATION NUMBER (DIN) DIN is a pre-requisite for e-filing of certain company related documents Applicable to existing as well as new directors except directors of foreign companies having branch offices in India Form, manner and fees to be prescribed by Central Government – At present no fees is required to get DIN CG to allot DIN within one month from the receipt of the application Only 1 DIN permitted DIN not an alternative to PAN Existing Director to intimate his DIN within one month to all the companies wherein he is a director Companies to intimate DIN to Registrar within one week DIN to be quoted in all returns/information/particulars in case they relate to directors Penal Provision – Rs.5000/- and in case of continuing default Rs500/- per day

61 Recent Global trends in Company law by Vinod Kothari 61 DIN – SOME ISSUES What happens to existing DINs taken before the commencement of Companies Amendment Act, 2006? [Second Proviso to Section 266A – weird drafting] What if the existing director is out of station or incapacitated for 60 days?

62 Recent Global trends in Company law by Vinod Kothari 62 Some significant recent rulings SC ruling in the Gaekwad family case – the only relevant restriction on allotment is the provisions of articles/memorandum Directors are not trustees for individual shareholders; they are only for the company In a significant ruling dealing with mergers, Rajasthan high court dispensed holding of meetings of shareholders and creditors based on sanction of concerned parties: [Rajasthan Telecom Company Ltd., In Re (Raj) [2006] 69 SCL 71] Revaluation reserves can be used for issuing bonus shares – SC ruling in Bhagwati Developers v. Peerless Finance House of Lords – charges of future assets are floating charges: National Bank of Westminster Auditors report relating to sec. 274 (1) (g) is to be based on verification of facts and not just statement made by the company – Calcutta High Court in Hindustan Club

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