This article is written by S.Aditya, a graduate of B.B.A. LL.B. from KLE Society’s Law College, Bengaluru. The article focuses on the history of the present company legislation of India.
As we all know that India has drawn a lot of legislation from England. Similarly, in the case of Companies law, India enacted company law based upon the company law enacted in England. The three phases which influenced the Company legislations may be divided as i) Colonization era; ii) Period after World War II & iii) the Opening up of Indian markets in the year 1990.
In the year 1850, the first Company enactment for the registration of the joint-stock company was introduced in India. This enactment as mentioned before was based upon the English Companies Act, 1844.
Later in the year 1857, the concept of limited liability was recognised in the companies legislation but the said limited liability was not extended to the banking company. The concept of limited liability into the Companies Act was introduced earlier in the English Companies Act of 1856. But by the year of 1858, the concept of limited liability was extended to banking company even in India.
In the year 1866 Companies Act was yet again passed for consolidating and amending the laws relating to incorporation, regulation and winding up of trading companies and other associations. This Act was based upon the Companies Act 1862 of England. This Act was recast in the year 1882 and was in use until 1913.
In the year 1913 another Indian Companies Act was enacted based upon English Companies Consolidation Act, 1908. Companies Act of 1913 was amended in the year 1914, 1915, 1920, 1926, 1930 and 1932. But the major amendment to the Companies Act of 1913 who was made in the year 1936 this amendment was based upon the English Companies Act. 1929. The act of 1913 regulated the Indian business company until 1956.
By the end of 1950, Bhabha committee was set up under the chairmanship of H. C. Bhabha. For the difference of Indian Companies Act with reference to the development of Indian trade and industry.
The committee submitted its report on 1952, this report of Bhabha committee was accepted Companies (Amendment) Act, 1956. This legislation was made keeping in mind the English legislation of Companies Act in 1948.
A little more trivia about the origin of the Act of 1956
The period of the Second World War and the post-war years witnessed an upsurge of Industrial and commercial activity on an unprecedented scale in India and large profits were made by businessmen through incorporated companies. The Government of India took up the revision of Company Law immediately after the termination of the last war. Two company lawyers— one from Bombay and the other from Madras— were successively appointed to advise Government on the broad lines on which, the Indian Companies Act, 1913, should be revised and recast in the light of the experience gained during the war years. Their reports were considered by Government and a memorandum embodying its tentative views was circulated towards the end of 1949 for eliciting an opinion.
On 28th October 1950, the Government of India appointed a Committee of twelve members representing various interests under the chairmanship of Shri H. C. Bhabha, to go into the entire question of the revision of the Companies Act, with particular significance to the development of trade and industry of India. This Committee, popularly known as the Bhabha Committee, submitted its report in March, 1952, recommending comprehensive changes in the Companies Act of 1913. The report of the Bhabha Committee was again the subject of discussion and comment by Chambers of Commerce, Trade associations, professional bodies, leading industrialists, shareholders and representatives of labour. The Bill, which eventually emerged as the Companies Act, 1956, was introduced in Parliament on 2nd September 1953. IT was a comprehensive and consolidating as well as amending piece of legislation. The Bill was referred to a Joint Committee of both Houses of Parliament in May, 1954. The Joint Committee submitted its report in May, 1955, making some material amendments to the Bill. The Bill, as amended by the Joint Committee, underwent some further amendments In Parliament and was passed in November, 1955. The new Companies Act (I of 1956) came into force from 1st April, 1956.
Major Changes brought forth by the Companies Act 1956 viz-a-viz the Companies Act, 1931
- Promotion and growth of Companies;
- Capital structure of the Companies;
- Company meetings and procedures;
- Company accounts and its presentation & powers and duties of the auditors of the company;
- Inspection and investigations of the affairs of the Company;
- The constitution of the Board of Directors, Powers and functions of directors, Managing Directors and Managers; and
- Administration of the Company Law.
The Amendments in the Companies Act, 1956
As any other legislation various amendments were made to the Companies Act 1956 as mentioned below:
Timeline of Amendments
Opening of the market gates to the Globe-1990
The Era of liberalisation, privatization and globalisation saw the anachronistic Companies legislation made in time of closed market and hence inadequate to handle the global entry. This non-conducive legislation would have obstructed the Indian Corporate Sector. In pursuance to this necessity the Companies Bill, 1993 was formed but was later withdrawn. The Depositories Act, 1996 was introduced in India and later a working Group was constituted to rewrite the Companies Act, 1956. In pursuance to above made effort the Companies Bill, 1997 was introduced in Rajya Sabha on August 14, 1997 in order to replace the prior legislation.
The President of India promulgated the Companies (Amendment) Ordinance, 1998 on October 31, 1998. But this promulgated the Companies (Amendment) Ordinance, 1998 was soon replaced by the Companies (Amendment) Act, 1999.
The objectives of the Companies (Amendment) Act, 1999:
- To surge the capital market by boosting the morale of the National business houses.
- Fostering the FITs and Foreign Direct Investments in the country.
The changes brought by the Companies (Amendment) Act, 1999 are:
- A facility was introduced to allow the Corporate Sector to buy-back company’s own share;
- Provisions relating to investments and loans were liberalised and rationalised;
- Requirement of prior approval of the Central Government on investment decisions was done away with and companies were allowed to issue “sweat equity” in lieu of the intellectual property;
- The compliance of the Indian Accounting Standard was made mandatory and the National Committee on Accounting Standard was also incorporated;
- The benefit of the investors was looked into by setting up “Investor Education and Protection Fund”;
- Introduction of the nomination to shareholders, debenture holders, etc.
Later, the Companies (Amendment) Act, 2000 was enacted, which was followed by the Companies (Amendment) Act, 2001 wherein the Section 77A was introduced in relation to buy-back of the shares. This amendment allowed the Board of Directors to buy-back the shares upto 10% of the paid-up capital and free reserves provided not more than one such buu-back is made during the period of 365 days. Then, the Companies (Amendment) Act, 2002 was enacted which was followed by the Companies (Second Amendment) Act, 2002. The first amendment introduced the setting-up and regulation of the Cooperatives as a body corporate under the Companies Act, 1956 to be called ‘Producer companies’. The Second Amendment was to expedite the winding-up process of the companies to facilitate rehabilitation of the sick companies and protection of workers interest.
The Companies (Amendment) Act, 2006, was brought into force on 1.11.2006 wherein it introduced the Director Identification Number (DIN) and also introduced electronic filing of various returns and forms.
The New Enactment of the New Society
The Companies Act, 2013 replaced the Companies Act, 1956. The legislators introduced ideas of the likes of:
- Corporate Social Responsibility (CSR)
- Class action suits
- Fixed term for the Independent Directors
- The provision of raising money from the public was made little stringent
- Prohibition on insider trading by company directors or key managerial personnel by declaring such activities as a criminal offence
- It permits shareholder agreements providing for the ‘Right of First Offer’ or ‘Right of first Refusal’ even in the case of Public Companies
The Companies (Amendment) Act, 2015: It received the presidential assent on May, 2015 and became operate on 29th May, 2015. It is designed to address the issues of the stakeholders such as Chartered Accountants and other professionals.
Key Amendments brought in by the Companies (Amendment) Act, 2015 may be explained as follows:
No minimum paid-up share Capital requirements will now apply for incorporating private as well as Public Companies in India.
In the case of related party transactions which requires stake-holders approval relaxation has been given wherein earlier required special resolution has been replaced by the ordinary resolution.
Inspection of the resolution filed with the Registrar
This Act has limited public access of such resolutions relating mainly to the strategic business matters. Such documents will no longer be available for the public to review or permitted to take copy of.
Common Seal Optional
Under the Act of 2013 it was required to affix common seal on certain documents but, now after the Act of 2015, the use of the common Seal has been made optional although the common seal is one of the integral characteristics of a Company.
Violations of Acceptance of Deposits
Companies Act of 2013 provisions in relation to the Acceptance/ renewal/ repayment of deposits. However no specific penalty prescribed for the new compliance with the relevant provision i.e. Section 13 and Section 76.
A new Section 76A has been introduced for these non-compliances. The defaulting company will be liable for a minimum fine of INR 1 crore and maximum amount of INR 100 crore in addition to the amount of deposit or part thereof alongwith interest.
The Companies Act, 2015 has introduced a proviso which states that a company must set-off the losses and depreciation carried over from past years against the profits of the company before declaring dividend for a financial year.
The Companies (Amendment) Bill, 2016 was intended to be passed by the legislature, but after referring it to the Committee this Bill went through a lot of corrections and metamorphosed into The Companies (Amendment) Bill, 2017 which was then passed as the Companies (Amendment) Act, 2017. The salient features of the amendments brought by this Act are:
- Synergy with SEBI and RBI Rules: For the first time, several provisions have been amended to align the Act with various rules and regulations of the SEBI (Security Exchange Board of India) and the RBI (Reserve Bank of India). For example, Sections 194 and 195 of the Act, which was dealing with the offence of insider trading and forward dealing, have now been omitted since the SEBI regulations were succinct to cover all.
- The instances of such frauds. Further disclosures to be made in the prospectus have also been aligned with the SEBI’s power to regulate IPOs (Initial Public Offering). The definition of ‘debenture’ has been amended to permit RBI to disqualify certain instruments as debentures.
- Proportionality of penalties: The quantum of penalty will now be levied taking into consideration the size of the company, nature of business, injury to public interest, nature and gravity of default, repetition of default, etc which is one of the most appreciated amendments. Two new provisions regarding the determining of the level of punishment have been freshly introduced and lesser penalties for one person companies and small companies were inserted. Provisions for small companies and penal vigour has been reduced.
- Placement process made easier in Private Sector: The placement process is rationalised by doing away separate offer letter details to be kept in the records of the Company and hence reducing the number of filings to Registrar. The company is not allowed to use money from private placement unless allotment made and the return of the same filed with the registrar To make sure that an investors are informed, the disclosures are made under Explanatory Statement as provided in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form. Change in definition of private placement is proposed to umbrella all securities offers and invitations other than rights. The Companies would be allowed to make an offer of multiple security instruments simultaneously.
- Standards for Independent Director : Section 149 of the Act deals with the qualifications and disqualifications of independent directors. Sub-Section (6) provides for various disqualifications for becoming an independent director, one of which is, such a person having “pecuniary relationship” with “the company, its holding, subsidiary or associate company, or their promoters, or directors”. The amendment clarified that ‘pecuniary relationship’ excluded the remuneration of director having transaction not exceeding 10% of his total income or such amount as may be prescribed.
The Companies (Amendment) Act, 2019
The Companies (Amendment) Act, 2019 received the assent of the President on the 31st July, 2019. While introducing the Bill in the Lok Sabha, the Hon’ble Finance and Corporate Affairs Minister, Nirmala Sitharaman said, “the Bill seeks to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector as enshrined in the Companies Act, 2013”.
In order to review the Companies Act and to gain better compliance, the Government of India constituted a Committee in July, 2018. The said Committee, after taking the opinions of several stakeholders of the Company, submitted its Report in August, 2018. The Committee recommended that serious offences must face rigour of law but technical mistake be given in-house adjudication for speedy redressal. Accordingly, proposal to amend certain provisions of the Companies Act, 2013 was made, however, in view of the urgency, the Companies (Amendment) Ordinance, 2018 was promulgated on November, 2018. To replace the aforesaid Ordinance, the Amendment Bill was introduced in Lok Sabha and passed, but Bill was not taken up in Rajya Sabha.Therefore, to continue the effect of prior ordinance the President promulgated the Companies (Amendment) Ordinance, 2019 on the 12th day of January, 2019 and the Companies (Amendment) Second Ordinance, 2019 on the 21stday of February, 2019. Then the Companies (Amendment) Bill, 2019 was passed by both the houses of parliament and became the law.
The Major reforms undertaken by the Ordinance of 2018 and 2019 include the following:
- Re-categorisation of offences which are in the category of compoundable offences to an in-house adjudication framework. However, no change has been made for any of the non-compoundable offences.
- Ensuring compliance of the default made and prescribing deterrent penalties in case of repeated defaults.
- Delegation and De-clogging the NCLT by:
- Enlarging the jurisdiction of Regional Director (“RD”) by increasing the pecuniary limits up to which compounding of offences under Section 441 of the Act can take place.
- Vesting in the Central Government the power to approve the alteration in the financial year of a company under Section 2(41).
- Vesting the Central Government the power to approve cases of conversion of public companies into private companies so as to reduce the burden on the government and developing the sector.
- Other reforms include re-introduction of declaration of commencement of business provision; greater accountability with respect to filing documents related to creation, modification and satisfaction of charges; non-maintenance of registered office to trigger de-registration process; holding of directorships beyond permissible limits to trigger disqualification of such directors.
The Amendment brought to the legislation were earlier reactive in nature for instance the major amendments were the reaction to the global phenomenon of i) Colonization era; ii) Period after World War II & iii) the Opening up of Indian markets in the year 1990. But the recent Amendments are more Proactive in nature and seeks to increase the efficacy of the Legislation with respect to the dynamics of the Society.
- The English Companies Act, 1844
- The Indian Companies Act, 1913
- Companies Act of 1913.
- The Depositories Act, 1996
- Bhabha Committee Report, 1952
- The Companies (Amendment) Act, 2001
- The Companies (Share Capital and Debenture) Rules, 2014
- The Companies (Amendment) Act, 2015
- The Companies (Amendment) Act, 2017
- The Committee Report. 2018
- The Companies (Amendment) Act, 2019
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