The proposed provisions will enhance the protection of the deposit holders

Companies will have to incur additional costs due to requirements related to credit rating, maintenance of additional liquid funds, deposit insurance, etc.

1. ACCEPTANCE OF DEPOSITS

The 2013 Act states, that only those companies which meet such net worth or turnover criteria as may be prescribed will be eligible to accept deposits from individuals other than its members. Such companies will also be required to obtain the rating (including its net worth, liquidity and ability to pay its deposits on due date) from a recognized credit rating agency which ensures adequate safety [section 76(1) of the 2013 Act]. Companies that do not meet the net worth or turnover criteria will only be able to accept deposits from its members [section 73(2) of the 2013 Act]. All companies will be required to comply with the prescribed conditions which include the issuance of a circular to its members, obtaining credit rating, providing deposit insurance, maintaining deposit repayment reserve account, etc. [section 73(2) of the 2013 Act].

2. OUTSTANDING DEPOSITS

The 2013 Act states that deposits accepted before the 2013 Act comes into force will need to be repaid within one year from the commencement of the 2013 Act or when such payments are due, whichever is earlier [section 74(1) of the 2013 Act]. This is likely to create a significant financial impact on companies that have currently accepted deposits and will not meet the eligibility criteria under the 2013 Act.

3. PROTECTION OF DEPOSITORS

An amount equivalent to a minimum of 15% of deposits maturing during the financial year as well as the following financial year will need to be kept in a separate bank account with a scheduled bank. The Companies (Acceptance of Deposits) Rules, 1975 currently requires that 15% of deposits maturing during the financial year needs to be kept in the bank or invested in specified securities [section 73(2) of the 2013 Act]. Additionally, the 2013 Act also states that the deposit insurance as prescribed will also be required to be provided [section 73(2) of the 2013 Act].

Registered valuers

The 2013 Act has introduced a new concept of registered valuers who are required for providing valuation reports mandated under various sections. These include the following: • Further issue of share capital (section 62 of the 2013 Act) • Restriction on non-cash transactions involving directors (section 192 of the 2013 Act) • Compromises, arrangements and amalgamations [section 230 of the 2013 Act] • Purchase of minority shareholding (section 236 of the 2013 Act) • Submission of a report by the company liquidator (section 281 of the 2013 Act) • Declaration of solvency in case of proposal to wind up voluntarily (section 305 of the 2013 Act) • Power of the company liquidator to accept shares, etc., as consideration for the sale of property of the company (section 319 of the 2013 Act]) • The qualification, experience as well as the process of registration as a valuer has been prescribed in the draft rules* (section 247 of the 2013 Act).

Winding-up

Dealing with fraud

The 2013 Act deals extensively on the issue of fraud (section 447 of the 2013 Act) and has for the first time defined fraud specifically as: “Fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss” The term, ‘wrongful gain’ means gain by unlawful means of property to which the person gaining is not legally entitled and ‘wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled [Explanation to section 447 of 2013 Act].

Shareholder democracy

Acknowledging the concept of shareholder democracy, various provisions have been incorporated in the 2013 Act. These provisions can be broadly classified as under:

1. Shareholder rights or protection

Class action suits: A class action is a legal form of lawsuit where a large group of individuals collectively bring a claim to court or in which a particular class of defendants is being sued. The concept of a collective lawsuit finds its roots in the US, where it is still widely prevalent. In several European countries, changes have been made recently in their civil law, to allow consumer organizations to bring claims on behalf of large groups of consumers. Acknowledging the need to be at par with global standards, for class-action lawsuit, the 2013 Act has empowered shareholders associations or group of shareholders to take legal action in case of any fraudulent activity on the part of the company and to take part in investor protection activities and class action suits(section 245 of the 2013 Act). Additionally, in response to the Standing Committee’s recommendation in its Twenty-First Report for ensuring the protection of interests of minority shareholders and small investors, the MCA suggested that during adjudication on class action suits, the Tribunal will ensure that the interests of shareholders are protected and wrongdoers, including auditors and audit firms, are required to compensate the victims on suitable orders by Tribunal. Also, as stated in the 2013 Act, the central government will have the power to prescribe class or classes of companies which shall not be permitted to allow the use of proxies. The 2013 Act also to have provisions to provide that a person shall have proxies for such a number of members or such shares as may be prescribed.

2. Special consideration to small shareholders

The 2013 Act acknowledges the existing rights of small shareholders envisaged in section 252A of the 1956 Act under the following sections: