Defaulting directors may be disqualified

NEW DELHI, NOV 10: The Department of Company Affairs DCA is planning to move legislation in the winter session of Parliament, which wil...

NEW DELHI, NOV 10: The Department of Company Affairs DCA is planning to move legislation in the winter session of Parliament, which will automatically disqualify directors of firms who do not pay either interest or dividend for a period of one year from the date on which this was first due. These directors will be disqualified for a period of 5 years, and will not be able to hold directorships in any firm in the country for this period. The number of firms that an individual can be a director of will also be cut to 15, from 20 at present.

This will form part of the amendments to the Companies Act and, if accepted, will go a long way in safeguarding the interests of small investors, either those who buy a firm8217;s equity or have deposits in it. Currently, several prominent individuals become directors on the boards of scores of companies this draws innocent investors to these companies, but these directors are not held responsible when the investors don8217;t get their money or interest back. Once this amendment is put in, all company directors will begin to pay close attention to the manner in which their companies are run. And since the Act will make this automatic, there is no question of such penal action being challenged in a court of law.

The DCA is, in fact, working on several such amendments for the winter session, aimed specifically at trying to ensure that investor interests are taken care of. It is proposed that, for going public, public limited firms must have a minimum paid up capital of Rs 5 lakh 8212; this will be Rs 1 lakh for private limited firms, and there will be a provision to hike both limits from time to time. This is to ensure that only better firms are allowed to raise funds.

The bill is also likely to outline certain special criterion with respect to small investors every firm will not only have to ensure that these are met, it will be made obligatory for the firm to report if they have not complied with this. The period in which dividends have to be distributed will be cut from 42 at present to 30, interim dividend payments will become mandatory. There will be several checks on auditors as well, to ensure they audit books better. For one, auditors will be debarred from holding equity in the firms whose accounts they audit. Public listed firms with a paid-up capital of over Rs 5 crore will have to set up audit committees. Also, any firm that offers shares or accepts deposits from more than 50 people will be deemed to be a public limited company.

And while all penalties for non-compliance will be raised 10 times, more powers will be given to the DCA. Today, the DCA does not have any powers to force companies to give it information, nor does it have any powers to ensure that other companies or banks give it the information it needs about other companies.