Ref. : E&R/Press/’05/DCA/jsdv

Companies Act Fails to Protect Investors from ‘Vanishing Companies’ : CERC

Consumer Education and Research Centre (CERC), Ahmedabad, in a note, has underlined the need to look at the phenomenon of ‘vanishing companies’ which have “comfortably and conveniently escaped fiduciary liability,” when investors have lost their lifetime savings.

In response to an invitation from the Union Ministry of Company Affairs, Prof. Manubhai Shah, Chairman Emeritus, CERC submitted the organisation’s suggestions and comments on the Concept Paper on Company Law. Dr. J.J. Irani, Director of Tata Steel and Tata Sons, has been appointed head of a committee to draft the new Companies Act. Subsequently Prof. Shah made a presentation on the proposed draft Companies Law to Irani Committee recently.

Offering its suggestions on the Concept Paper to review and revise the Companies Act, 1956, CERC said the very expression ‘Investor or Investor Association or investing public’ was absent in the Paper while inviting suggestions and objections from the public. CERC objected to the expression: “After incorporating valuable suggestions of the corporate sector, the Companies Bill will be framed for introduction in the Parliament”. That was to say, the Ministry’s only concern was the views and opinions of the corporate sector, the representation said adding, “There cannot be any greater insult of, and indifference to, the small investors than this statement. Ultimately, the law will then be such which the corporate sector wants,” CERC said.

Millions of investors in India have lost their lifetime savings in vanishing companies. Still no director or promoter of a vanishing company had been held responsible. Investors’ primary concern was to get the money back in time with interest. The Concept Paper did not show any concern and it failed to satisfy the needs of the investing public, CERC said.

The Joint Parliamentary Committee (JPC) on 19 December 2002 had recommended that the Investor Education and Protection Fund (IEPF) be transferred from the Department of Company Affairs (DCA) to the Securities and Exchange Board of India (SEBI). The present Minister of Company Affairs who was a member of the JPC at that time, in a recent interview said that the IEPF would not be transferred to SEBI.

On public deposit and its protection, Section 33 Sub-section 2(b) insists on the companies to advertise their financial position and then only it could mobilise funds from the public, whereas Sub-section (4) prohibits any company from mobilising funds if it had defaulted or delayed repayment of deposits or interest. What steps the Government had taken for a company’s default? CERC asked.

No company should be allowed to solicit or accept deposit from the public or its shareholders unless and until it has an adequate insurance cover, CERC said.

Change in name or registered office of the company should not be permitted when their default in repayment of fixed deposits, redemption of debentures or investors complaints are pending. The companies should obtain ‘No objection’ certificate from SEBI and Stock Exchanges where their shares are listed, CERC said.

Shareholders of a company spread all over the country can not attend and vote at the general meeting at the place of registered office of the company for various reasons. Hence, voting by postal ballot should be made mandatory for passing all important resolutions, CERC added.

Companies offer Preferential allotment of shares to their promoters or directors at a throw-away price. For example, Colgate shares were allotted at a price of Rs. 60/- per share against the market price of Rs. 700/- on the date of issue. Nestle’s shares have been issued at Rs.70/- per share in the place of its market price of Rs.285/- making it an unjust gain of Rs. 102 crore to its promoters. This should also be stopped, CERC said.

Date : 13/04/2005
Place : Ahmedabad

Pritee Shah
Editor
INSIGHT - The Consumer Magazine

————————————————————————————————-

CONSUMER EDUCATION AND RESEARCH CENTRE
“Suraksha Sankool”, Thaltej, Sarkhej-Gandhinagar Highway, Ahmedabad - 380 054 (INDIA)
Phone: 079-27489945-46 Fax: 079-27489947
E-mail: cerc@wilnetonline.net
Web Site: http://www.cercindia.org
————————————————————————————————-