The Hindu Business Line : Floating a co? Get all your cards ready

FLOATING a company and then getting a few directors on board was easy, you thought. Not for long, if the Department of Company Affairs (DCA), which has received plenty of flak for a spate of corporate scams, has its way.

A committee constituted by the DCA has recommended tougher procedures for floating of companies. The committee has recommended that subscribers to the memorandum will be required to furnish details of their permanent account number (PAN), identity card issued by the Election Commission along with their address, description, occupation and proof of their identity.

"This will help to trace out the unscrupulous persons who disappear, elope or impersonate after cheating the public through the mode of companies formed by them for such deceitful purposes," the committee reckons. The DCA sponsored committee's mandate was to examine the remaining provisions of the Companies Act 1997.

Section 15 of the Companies Act, 1956 stipulates that the Memorandum of Association of a company would have to be signed by each subscriber who would also have to list out his address, description and occupation, if any. When a new company is formed, the subscription clause of its memorandum is required to contain the details of its subscribers such as their address, description and occupations. These details are merely required to be attested by a witness.

"At present, there is no procedure of verification of the declarations made and the Registrar accepts these details in the form they are presented in the memorandum of persons (subscribers) desirous of forming the company," the committee has said.

There have been instances where certain companies "vanished" and subscribers to the Memorandum of Association running away soon after collecting funds from the public through public issues of shares, debentures, bonds or mobilisation of deposits.

In the absence of adequate data of persons at the helm of such companies, the enforcement agencies and regulators are facing a lot of problems in locating and initiating legal action against such "vanishing" companies and their alleged delinquent subscribers, directors and promoters. "Therefore, this proposal will in some way help in tracing out the unscrupulous persons," sources told Business Line.

In order to foster good corporate governance, the committee has also suggested barring promoters from withdrawing once having subscribed to a public issue. One way for companies to raise capital is by floating a public issue of shares by issuing prospectus where a particular time frame is indicated within which time the public is asked to make its applications. As the committee has said "an application for shares is only a proposal to buy shares and like all other proposals can be withdrawn by the applicant before its acceptance."

Section 72(5) of the Companies Act provides that application for shares in or debentures of a company, would not be revocable until after the expiration of the fifth day after the time of opening of the subscription lists. However, as the committee observed, certain unscrupulous promoters first subscribe to the issue and follow up by public announcement to this effect to create and enhance public confidence and then surreptitiously withdraw their application for subscription.

"Such malpractices need to be curbed forthwith. It is, therefore, proposed to prescribe that persons described in the prospectus as promoters or directors including relatives thereof and who have applied pursuant to such prospectus shall not be entitled to revoke their application for shares or debentures once having been made," the committee has said.

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