The Hindu Business Line : Catch them before they vanish

The manner in which some plantation and other companies were floated in large numbers making tall claims and promises and then disappearing without so much as a trace a couple of years ago is still fresh in public memory.

SEBI made valiant efforts to bring them to book but not with any significant measure of success.

The law moves too late and too slowly to be able to catch up with them. The following are the statutory measures that are expected to curb the activities of criminals who mobilise public investments by false and misleading representation and then abscond, leaving the `bare shell' of companies which could do little or no business, and no clue to the identity of their creators:

Two clear copies of recent photographs of all subscribers to a new company's memorandum and also of the witnesses for each of the subscribers.

The photographs shall be signed by the subscribers and the witness along with proof of the identity of the subscribers (new sub-section (4) of Section 13 — Clause 8 of the Amendment Bill).

The following new Section 30 is to be substituted for the existing Section 30:

"(1) Articles shall... c) state the name of each subscriber, his address, description and occupation, if any, who shall sign in the presence of at least one witness who shall attest the signature and shall likewise add his address description and occupation, if any.

"2) There shall be affixed two clear copies of recent photograph of all the subscribers of the memorandum and the witness and each such photograph shall be signed by the subscribers and the witnesses along with proof of the identity of the subscribers."

Photographs of the promoters or the witnesses who have attested their signature may enable the regulatory authority to track down some of them but that could be an elaborate and eventually fruitless process. A quicker solution may be to provide for insistence on the opening of a current or saving account with a bank, in which the entire subscribed capital shall be credited and retained till commencement of business by the company.

The company may also be required to appoint a chief accounts officer (CAO) in terms of the proposed Section 215A with immediate effect.

He may function also as the company's internal auditor (IA) to start with. The CAO-cum-IA, so appointed, shall certify and send monthly report to SEBI and the Director-General of Inspection appointed under new Section 609A, on the total volume of deposits, withdrawals and balances at the beginning and end of each month, till the actual commencement of the business for which the company was set up.

A designated officer in the Director-General's office should be entrusted with the responsibility for watching the nature and volume of transactions in the bank account till the commencement of business by the company. If required he should take appropriate action to safeguard the interest of the subscribers/investors.

The Director-General may, in his discretion, extend the period of internal audit and monthly report to him even after the commencement of business, till the closure of the books for the first year of account.

Insistence on the company's supply of the minutes of the meetings of its board of directors during the first year may help to satisfy the Director-General that the company is not one that is likely to do the vanishing trick, before its funds are invested in land, building and other assets.

There is not a great deal that the Director-General or the Registrar can do thereafter. It should be the SEBI's responsibility to see in consultation with the stock exchange that there is no major mishap thereafter.

(By arrangement with Corporate Law Adviser, New Delhi.)

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