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Not for the aam company

Written By Admin on Tuesday, 1 October 2013 | Tuesday, October 01, 2013

Author -  K. RAMESH & R. BALASUBRAMANIAM

No Capital for Small business

The new Companies Bill treads over small companies with jackboots.

According to the October 2011 statistics from the Department of Company Affairs, there are 11,63,136 companies registered in India. Of these, only 24,682 (or 2.12 per cent) have paid-up capital between Rs 2 crore and Rs 5 crore, and companies with paid-up capital over Rs 5 crore number 23,589 (2.02 per cent).

In other words, a good majority, i.e. 98 per cent, have paid-up capital below Rs 5 crore (less than $1 million). A whopping 11,14,865 companies (95.84 per cent) have paid-up capital less than Rs 2 crore — compared with global standards, these companies are of no size at all. The owners of these small companies carry on business with their own capital. In fact, listed companies comprise only 0.6 per cent; the remaining 99.4 per cent are unlisted public or private companies.

Small companies have little credit support. Even when banks lend to them, they cover them with securities from all sides — the company, the pledge of shares owed by promoters, their personal guarantee and even properties before lending. This, in effect, means that lenders strip them of their corporate personality and treat these companies as partnership or proprietary entities for the purpose of loans. With private borrowings through deposits banned by law, these companies have no scope for such capital. Trade creditors are secured by winding up their rights under company law in addition to other rights under other laws for recovery.

Thus, small companies carry on their business risking their own capital, and even where lenders contribute debt-capital, the lender’s interest is more than covered, looking beyond the corporate mask for securities, both commercial and legal.

Meaningless Controls
In effect, the provisions of the new Companies Act not only maintain the controls of the 1956 Act, but has actually amplified them in depth and scale!

In other parts of the world such as the UK, US, Australia and Singapore, small companies are left free to manage their own internal affairs and a registry is kept only for filing purposes. Audit is not a legal compulsion, it is left to market forces. However, under the provisions of the updated Bill, private companies are expected to audit their accounts and auditors are duty-bound to report to shareholders — who are none other than the owners of the small companies themselves!

The owner of a small company cannot loan money from the business to himself/herself or relatives. Where a company is owned by family members, the owners cannot appoint relatives to office or enter into contracts without the consent of the shareholders.

If a public company needs to convert itself into a private company, it requires moving the tribunal for clearance. Private companies, by definition, are closely held and can impose restrictions of sorts in their articles.

But now they are mandated to share the reasons for refusal of transfer of shares. The postal ballot — which is intended for a large body of listed company shareholders — is made applicable to all companies. In the case of a one-man company, will the individual issue a postal ballot to himself/herself?

Higher compliance cost

Between 30 and 40 per cent of dormant small companies have abandoned filing with the registrar of companies. Such companies can be regulated as follows:

Strike off dormant companies according to a clearly set-out timeline.

Free companies with under Rs 2 crore paid-up capital from having to fulfil unnecessary procedures under the Act.

Allow market forces to self-govern small companies by using company secretaries and chartered accountants for for securing creditors’ interests.

India’s small entrepreneur effectively does not enjoy the benefits of limited liability.
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(This article was published in the Business Line print edition dated September 21, 2013)


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