Historical background

3. Com pany legislation in India started w ith the Joint Stock

■Companies A c t, 1850 (A ct X L I I I o f 1850). A n historical account
o f the course o f subsequent legislation w ill be found in the report
o f the Com pany L a w Com m ittee subm itted in 1952. Indian
Com pany L a w has been largely based on the prevailing English
Law . T h e predecessor o f the Com panies A c t, 1956, was A c t V I I
o f 1913, w h ich underwent several am endm ents, including the
amajor amendments o f 1936 and 1951 when A cts X X I I o f 1936
and L I I o f 1951 were passed. T h e period o f the Second W orld
War and the post-war years witnessed an upsurge o f Industrial
and com m ercial activity on an unprecedented scale in India and
large profits w ere m ade by businessm en throu gh incorporated
companies. D u ring these years, several developm ents took place
in the organisation and management o f joint stock com panies
which attracted public attention. A t the end o f th e W ar, the
Com pany L aw Am endm ent Com m ittee in the U nited K in g d o m
familiarly know n as the Cohen Com m ittee, after an enquiry spread
over two years, subm itted its report recom m ending far-reaching
changes in the English Com panies A c t, 1929. In India, too,
there was a general feeling that in vie w o f the experience gained
during th e war years, the tim e was ripe for fresh legislation so
as to ensure efficient and honest m anagem ent o f the business
o f companies and check unfair business m ethods and anti-social
practices resorted to by some persons engaged in the management
o f companies. T h e Governm ent o f India took up the revision o f
Com pany L a w immediately after th e term ination o f the last war.
T w o company lawyers— one from B om bay and the other from
Madras— were successively appointed to advise G overnm ent
on the broad lines on w h ich ,the Indian Com panies A ct, 1913,
should b e revised and recast in the ligh t o f the experience gained
during th e w ar years. T h e ir reports w ere considered b y G o v ern ­
m ent and a memorandum em bodying its tentative views was
circulated towards the end o f 1949 for eliciting opinion. O n
28th October, 1950, the G overnm ent o f India appointed a C o m ­
mittee o f twelve m em bers representing various interests under the
chairmanship o f Shri C . H , Bhabha, to go into th e entire question
o f the revision o f the Com panies A c t, w ith particular reference
to its bearing on the developm ent o f trade and industry in the
 i

country. T h is Com m ittee, popularly know n as the Bhabha

Com m ittee, subm itted its report in M arch, 1952, recom m ending
com prehensive changes in the Com panies A c t o f 1913. T h e report
o f the Bhabha Com m ittee was again the subject o f discussion and
com m ent b y Cham bers o f Com m erce, T ra d e associations, p ro ­
fessional bodies, leading industrialists, shareholders and repre­
sentatives o f labour. T h e Bill, w hich eventually em erged as
the Com panies A c t, 1956, was introduced in Parliam ent on 2nd
Septem ber, 1953. I T was a comprehensive and consolidating
as w£ll as am ending piece o f legislation. T h e B ill was referred
to a Joint C om m ittee o f both H ouses o f Parliam ent in M ay, 1954.
T h e Joint C om m ittee subm itted its report in M ay, 1955, making
som e material amendm ents to the Bill. T h e Bill, as amended
b y the Joint Com m ittee, underwent som e further amendments
In Parliam ent and was passed in N ovem ber, 1955. T h e new
Com panies A c t (I o f 1956) came into force from 1st A p ril, 1956.

Ob/e^friv^s o f the new legislation

4. T o some extent, the new A c t reflected the prevalent trends

o f public opinion. It was considered desirable in the public
interest, and in order to prevent the diversion o f companies’ funds
for purposes that thw arted national economic policies or approved
econom ic objectives, that the Governm ent should have greater
control over the form ation and management o f joint stock
companies. A m inim um standard o f good, behaviour and business
honesty in com pany prom otion and management, a due recogni*
tion o f the legitim ate interests o f the shareholders and creditors
and o f the d u ty o f the management not to prejudice or jeopardise
those interests, provision for greater and effective control over and
voice in the management for shareholders, a fair and true disclosure
o f the affairs o f companies in their annual balance sheets and
profit and loss accounts, a higher standard o f accounting and
auditing, a recognition o f the rights o f shareholders to receive
reasonable inform ation and facilities for exercising an intelligent
judgem ent w ith reference to the management, a ceiling on the
share o f profits payable to the management as remuneration for
services rendered, a check on their transactions w here there was a
possiblility o f conflict o f interest and duty, a provision tor
investigation in to the affairs o f any company m anaged in a maimer
 4

prejudicial to th e interests o f th e com pany as a w h o le or op p ressive

to a m inority o f the shareholders, enforcem en t o f th e perform ­
ance o f their 'duties b y those engaged in th e m anagem ent o f
public com panies or o f p rivate com panies w h ich w ere subsidiaries
o f public com panies b y providing sanctions in case o f breach and
a speedy and effective m achinery for liq u id a tio n o f com p an ies—
these were am ong the objectives o f th e n ew legislation. A t th e
same tim e, it w as recognised th at p rivate enterprise h ad p layed
and had still a large part to p lay in th e in dustrial and
econom ic progress o f the country and that join t stock
companies covered such a w ide area o f th e in dustrial and
com m ercial field in the p rivate sector th at their continu ed ex is­
tence and effective fu n ction in g should n o t b e im perilleci b y th e
imposition o f unduly irksom e restrictions and fetters on th e ir
activities. I t was not th e ob ject or p u rp o se o f th e A c t to .p ut
private enterprise in a strait jacket leavin g 110 room for free p lay
at the joints. Its object was rather to encourage honest p rivate
enterprise a n d safeguard p rivate investm ents in fields not ear­
marked for th e p u blic sector. It was considered necessary th at
th e influence o f the general body o f shareholders in an y com p an y
should not b e elim inated b y a sm all con trollin g grou p . In vie w
o f the representations m ade to the C om m ittee as regards th e ob jec­
tives o f the A c t, we have set ou t ab o ve w h at w e co n ceive to
b e “ the purposes un derlying the A c t” w ith in th e m eaning o f ou r
terms o f reference. W e take the view th at any reassessm ent o f
th e considerations o f general econom ic o r social p o lic y on w h ich
th e A c t is based is outside th e am bit o f ou r enqu iry. I n d iv id u a l
cases o f m ism anagem ent o f th e affairs o f com panies w h ich w ere
brought to o u r notice are also outside ou r p u rvie w except in so
fa r as they disclose defects and om issions in th e existin g law
requiring to be rectified.

C ritics o f the A c t

5. T h e Com panies A c t o f 1956 w as the ou tcom e o f a p ro­

longed and detailed consideration (b oth inside and outside th e
legislature) o f the various aspects o f com pan y law lan d adm inistra­
tion. I t has nevertheless been the subject^of criticism b y business­
m en, com pan y m anagem ents, shareholders, accountants and a u d i­
tors, law yers and judges. C ritics o f th e enactm ent— and th e y are
 5
num erous— have focu ssed attention on its inordinate length*
th e com p lexity o f its stru ctu re, its in vo lved language, the vagu en ess
an d obscu rity o f m any o f its m aterial p rovision s, th e interposition
o f G overn m en t control e v e n in apparen tly m inor m atters, th e
p leth ora o f return s and form s requ ired to b e fu rn ish ed b y th e mana­
gem en t w ith ou t any corresponding u tility , th e loopholes it has
left, and m any other features w h ich m ake th e enactm ent cum ber­
som e or. d e fective and difficult o f application. U n d e r o u r term s
o f reference, w e have b een asked to consider w h at changes in th e
forrft or stru ctu re o f th e A c t are necessary or desirable to sim p lify
it. I t is p ossible to have a different lay o u t o f th e A c t on the basis
o f a su b ject-w ise arrangem ent and a regro u p in g and recasting
o f its different p rovisions. F o r instance, sections 198, 199, 200,
20 1, 309, 310 , 3 1 1 , 3143 34 §5 349 = 350 , 3 5 i> 352 , 353 s 354 , 381,
and 387 relatin g to m anagerial rem uneration m igh t b e grouped
togeth er and com p ressed into a pm a ller num ber. T h e sam e
co u ld h ave been done abo u t th e sections dealing w ith different
m odes o f liq u id a tio n . S im ilarly, exem ptions fo r p rivate com panies
co u ld have b e e n g rou p ed tog eth er. T h is w o u ld , h ow ever, have
n ecessitated a re w ritin g o f large p ortions o f th e A c t and a com ­
p lete rearrangem ent o f th e sections. W e ll-in fo rm e d opinion
w as alm ost u n an im ous against our attem p tin g su ch a drastic or
w holesale change. I t w as represented to us th a t it w as too soon
to in trod u ce m ajor changes or radical am endm ents and th a t d u rin g
th e tw en ty m onths th at h ave elapsed sin ce th e A c t w as passed,,
those respon sible fo r th e m anagem ent o f com pan ies as w ell as
shareholders had, w ith considerable efforts, fam iliarised th em ­
selves w ith its schem e and its different provisions and th a t it
w o u ld be a h ard sh ip to th e business co m m u n ity an d accountants
and auditors, i f th e y w e re n o w ob lig ed to sw itch over to a set o f
n ew provisions. T h e balan ce o f convenience and advantage was
fo u n d to lie in retain in g th e schem e and arrangem ent o f th e p resent
A c t, w h ic h , it m ig h t b e m entioned, m a in ly fo llo w s th e order in
w h ic h tjie different top ics w ere dealt w ith in th e In dian Com panies
A c t o f 1913. W e , th erefo re, focu ssed o u r atten tion on th e
difficulties atten d an t on th e w o rk in g o f th e A c t in actu al p ractice,
and the in terp retation o f its p rovisions. W e have trie d to p lu g
loopholes, su p p ly om issions, clarify am biguities, co rrect m istakes,,
rem ove in con sisten cies, o m it unnecessary or otiose provisions
and add oth ers co n d u cive to the sm o oth an d effective working.
 6

o f the Act. W e have also indicated th e changes recom m ended

b y us as far as possible in th e form o f drafts o f n ew sections or
.amendments o f tlie existing ones in th e hope th a t th e y m ight b e
o f some assistance to Parliam entary draftsm an.

S c h e m e o f th e A c t
6. T h e A c t w ith its 658 sections and 12 S ch ed u les, no d o u b t
appears, on the face o f it, to be far to o elaborate and detailed.
T h e increase in th e num ber o f sections in the (Indian) C om panies
A c t of 1956, com pared w ith the 462 sections o f th e E nglish' A c t
o f 1948, is due m ainly to the fo llo w in g reason s:—
(r) T h e inclusion o f several provisions -which do -.not find
a parallel in the E nglish A ct, b u t w h ich are peculiarly
appropriate to Indian conditions (e.g. sections 324 to'‘‘'377
relating to m anaging agents) ;

(2) the inclusion o f matters w hich form ed part o f the m od el

regulations for com pany m anagem ent contained in T a b le
CA ’ o f th e F irst Sch ed u le o f th e E nglish A c t in the body
o f th e new A c t as substantive provisions (e.g. sections 2S5
— 289);
(3) splitting o f m atter com prised in one section o f the p r e ­
vious A c t and o f the E n glish A c t into a num ber o f sections;
and

(4) repetition o f certain com m on statutory provisions w ith

reference to each o f the different classes o f officers o f
a com pany or different m odes o f w in d in g up o f a
com pany.

T h o u g h the num ber o f sections in the In d ian A c t exceeds those

o f its E n glish counterpart, still it w ill b e fo u n d th at th e volum e
o f printed m atter o f b o th th e A cts is app roxim ately the same,
t h e E nglish A c t having relegated to th e schedules several p ro ­
visions fou n d in th e b o d y o f the Indian A c t. It was p resu m ably
th e intention o f the legal draftsm an w h o drafted th e B ill, as
w ell as the th en F inance M in ister, w ho p ilo ted it in Parliam ent,
that the enactm ent should b e a self-contained, com plete and
exhaustive exposition o f the la w govern in g join t stock com panies
in India. W h atever m ight b e our v ie w i f w e h ad to w rite on
a clean slate w e have, in deference to th e alm ost unanim ous view s
 7

o f those w h om this legislation prim arily concerns, not attem p ted

to rew rite the A c t or up set its arrangem ent o f th e topics dealt
•with b y it. M o re o ve r, th e tim e allow ed to th e .Com m ittee was
to o short for s u c h an overhaul.

S c o p e o f th e e n q u ir y

7 . F ro m 1936 w lien m ajor am endm ents to the Indian Com panies

A c t; 1913 cam e to b e m ade, th e m anagem ents o f com panies and
even shareholders began to evince interest in th e shaping o f co m ­
p a n y law as w ell as in its application. T h e m ach inery set u p u n d er
th at A c t was, h ow ever, w h o lly inadequate fo r the task w ith the
re su lt that several provisions w ere h onoured m ore in the breach
thqn in their observance and irregularities on th e p art o f th e
m anagem ent often w en t un checked. T h e A c t o f 1956 has rem edied
this defect and p ro vid ed fo r some m easure o f G overn m en t con trol
o v e r com pany m anagem ent in the interests o f th e shareholders
a n d the in vestin g p u b lic. Sin ce the passing o f th e A c t, p u b lic
in terest in co m p an y law and its proper enforcem en t has increased
and the vo lu m e and variety o f representations that w e h ave received
sh o w th at sm a ll investors as w ell as m anagerial interests are be­
co m in g m ore an d m o re co m p an y-law m inded. T h is is all to th e
advantage o f h ea lth y joint stock enterprise. W c have taken into
consideration th e representations, w ritten and oral, m ade to u s b y
representatives o f trade an d in dustry, m anagem ents o f com panies,
representatives o f shareholders and b y accountants and law yers. W e
h a v e paid attention to the difficulties experienced b y the D ep art­
m e n t o f C o m p a n y L a w A d m in istration in the w o rk in g o f the A ct.
T h e C om m ittee w as asked to furnish solutions fo r several problem s
w h ich co n fron ted com panies and shareholders in d ivid u ally, appa­
ren tly tinder th e im pression th at the C o m m ittee w as a n advisory
b o d y constituted fo r g iv in g advice to the p u b lic. W h erever
questions affecting com panies and shareholders at large or a consi­
d erably section o f th em o r relatin g to th e interpretation o f abscure
or am biguous provisions o f th e A c t w ere raised, w e have attem pted
to d eal w ith th e difficulties p ointed out and given our reasons fo r
recom m ending a change in the law or a clarification o f th e m ean­
in g and effect o f th e sections o f th e A ct. W e h ave refrained from
assum in g the role o f a legal adviser or a ju d icial trib u n a l and
re co rd in g opinions on con crete cases b ro u g h t to our no tice. I t is
 8

ubvious that a great deal has to be le ft to ju d icial interp retation

in due course. W e have also refrained from recom m en d in g
hanges on matters o f m ajor p olicy. T h e decisions em b od ied
in the A c t on such m atters w ere taken after great deliberation a n d
ve ry recently and it w o u ld b e prem ature to alter su ch decisions
at this stage. W e have received nu m erous representations, e.g.*
on managerial rem uneration, proportionate representation, appoint­
m ent o f auditors b y G overnm ent, in vestm en t o f com pan ies’ fu n d s,
appointm ent o f G overnm ent directors o n com pan ies’ b o a rd s,
etc. W e have not recom m ended an y rad ical changes in 'Such,
matters, though divergent view s have b een expressed an d ch anges
advocated in the representations received: b y us.
M achinery for the A d m in istration o f the A c t
S. T h e previous A c t failed in its objectives to a considerable e x te n t
due to lack o f adequate and efficient m ach in ery fo r its enforce­
m ent. Its adm inistration w as left to th e S tates, w h o had little
interest in th e A c t and did n ot provide adequate staff. T h e C e n tral
G overnm ent have now taken over the enforcem en t and adm inis­
tration o f the A c t and set up an organisation fo r its p ro p e r w orkin g.
T h e D epartm ent o f C om pan y L a w A d m in istra tio n in its p resen t
shape consists o f a Secretariat O rganisation in N e w D e lh i. In t h e
field, there are fou r R egional offices and R egistrars o f Com panies
one for each State. T h e regional offices are u n d er R egion al D ir ­
ectors o f the status o f D e p u ty S ecretary and are located at
Bom bay, Calcutta, M adras and K a n p u r. E a ch regional organi­
sation has a qualified A cco u n ts Officer and a S o licito r to h e lp
and advise th e R egional D ire cto r and th e R egistrars in the region.
T h e status and stren gth o f these R eg istra rs’ offices v a ry accor­
d in g to the w ork-load. In accordance w ith th e provisions o f
th e A ct, an A d viso ry C om m ission with, a fu ll tim e C hairm an
has also been set up at headquarters to advise th e D ep artm en t in
th e discharge o f the various functions assigned to G o v e rn m e n t
b y the new A ct.
Sittings o f the C o m m ittee
9. T h e C om m ittee held separate sittings b etw een M ay, 19 5 7
and N ovem ber, 1957, o f w h ich seven w e re h eld at D e lh i and th e
rest at B om bay, C alcutta and M adras. A t th e first m eeting h eld
at D elh i on 27th M a y, 1957, the p rogram m e and p ro ced u re tO'
be follow ed b y the C om m ittee w ere settled. A t the seco n d m eetin g
h eld at D e lh i on 26th and 27th June, 1957, th e C o m m ittee exam in ed
 9

the view s and suggestions o f the D ep artm en t w ith regard to

rem edying d efects and rem ovin g difficulties fo u n d fro m exp erien ce
o f the w o rkin g o f the A ct. T h e th ird , fou rth an d fifth
m eetings w ere h eld at B om bay, C alcu tta and M adras respectively
on different dates betw een 3rd July an d 20th July3 and at these
m eetin gs the C om m ittee h ad the advantage o f a personal dis­
cussion w ith representatives o f m anagem ent as w e ll as o f share­
holders, C h am bers o f C om m erce, Banks, M illo w n e rs, C h artered
A ccou n tan ts, law yers and representatives o f A d vo ca te s’ A sso ­
ciations. A t th e sixth m eetin g h eld at D e lh i fo r a w eek from the
19th A u gu st, th e C om m ittee heard fu rth e r evidence and consi­
d e re d som e o f th e controversial points. A t th e seven th m eetin g held
at D e lh i" for a w eek fro m th e 5th Sep tem ber, 1957, the C o m m it­
tee considered th e draft rep o rt p repared b y th e C h airm an after
consideraing th e representations received b y th e C om m ittee.
F u rth e r consideration o f th e d raft report w as taken u p at th e eighth
a n d ninth m eetin gs o f th e C om m ittee at D e lh i fro m 2 1st to 24th
S ep tem b er, 1957 and from 15 th to 19th O cto b er, 1957, respectively.
T h e C o m m ittee h eld its last m eeting at D e lh i on 9th N o v em b er
to sign th e report. T h e evidence and suggestions subm itted
to th e C o m m ittee b y various organisations and individuals w ere
o f great assistance to it in its en qu iry and th e C om m ittee desires
to express its gratitude to a ll o f them .

A list o f the C h am bers o f C om m erce and T ra d e Association?

a n d individuals w h o p resented their view s b e fo re th e C om m ittee
is appended to this R e p o rt as A p p e n d ix I.

II
Am endm ents suggested
10. I t w ill be convenient to follow th e order o f the sections
o f th e A c t and to indicate th e changes w h ich w e recom m end
togeth er w ith a b r ie f statem ent o f our reasons therefor. A section-
w ise list o f am endm ents proposed b y us is appended to this
R ep ortoas A p p e n d ix II.

Section 2(3) : Associate

1 1. “ A ssociates” o f m anaging agents are su b ject to restrictions
a n d disabilities in their dealings w ith th e m anaged com panies
(see, for instance, sections 239, 249, 261 s 356 to 360 and 369), th e
o b je c t bein g to preven t m anaging agents fro m se cu rin g un fair