benefits of compounding of offences under the Companies Act

A prosecution of the offence would not be launched in a Criminal Court by filing a criminal complaint whereby the hassles of appearing before a criminal court would not arise. If a prosecution had already been launched, the compounding of offence puts an end to such prosecution.


The compounding fee payable in consideration of the appropriate authority allowing the application for compounding is not same as a fine levied by a criminal court. A fine will be levied as the or part of the punishment for the offence committed preceded by the court convicting the accused of the offence.

However it protects public interest by ensuring that prior to compounding, the default is remedied by compliance of the applicable provision; by curbing compounding of repeat offences and above all by making it a discretionary power. If a case involves serious offences investigated by CBI or Serious Corporate Frauds, the compounding authority may refuse to allow applications for compounding offences arising from seemingly technical defaults!

corporatelawmadesimple: Private Placement of Securities to 50 or more pers...

corporatelawmadesimple: Private Placement of Securities to 50 or more pers...: "In the year 2000, Section 67 of the Companies Act, 1956 [the Act] was amended to introduce a proviso prohibiting a company from issuing shar..."

Private Placement of Securities to 50 or more persons amounts to a Public Issue

In the year 2000, Section 67 of the Companies Act, 1956 [the Act] was amended to introduce a proviso prohibiting a company from issuing shares to 50 [Fifty] or more persons otherwise than through a public issue. A public issue of shares is a cumbersome and costly process with enormous disclosure requirements. It is not possible to proceed with an issue of shares to public unless Securities and Exchange Board of India [SEBI], which is the capital market regulator, clears the offer document. The aforesaid amendment was not made as clearly as we have mentioned in the opening sentence.


As you may be aware, lawmakers in India have always had the sadistic pleasure of saying something indirectly testing even the ability of persons with professional qualifications such as company secretaries and lawyers.

Prior to the above amendment, promoters of companies have issued shares to thousands and thousands of persons to raise equity capital. Such share issues were popularly known as private placement of shares and many such companies have vanished soon after the issue of shares. When this law was introduced, private placement of shares to people stopped for a while. However companies resorted to issuing shares to 50 [Fifty] or more people in tranches ensuring that each time the issue is made only to less than 50 [Fifty] persons.

Recently in a leading case, SEBI had issued an order against one such issue of shares by private placement. The aggrieved company termed the order of SEBI as “imprudent and inappropriate”. SEBI vide its order dated 24th November, 2010 held that the issue of Optionally Fully Convertible Debentures (OFCDs) by certain companies to persons who are allegedly friends, relatives, associates, employees and other individuals who are associated / affiliated or connected in any manner with those companies. SEBI held that an issue of securities to 50 [Fifty] or more persons is a ‘Public Issue” and consequently the issue ought to have been made after complying with the relevant provisions of the Act, the SEBI (ICDR) Regulations, 2009 and other Regulations.

corporatelawmadesimple: Grounds of Refusal against Registration of Tradema...

corporatelawmadesimple: Grounds of Refusal against Registration of Tradema...: "The Trademarks Act, 1999 (the Act) is the law in India containing absolute and relative grounds for refusal of registration of a trademark. ..."

Ensure that Arbitration Agreement applies to all necessary parties

If a party to a claim before an arbitral tribunal is a necessary party without whose presence no effective adjudication is possible and against whom there may a claim or any other relief sought, it is essential that such a party is a party to the arbitration agreement. Arbitration is a creation of the contractual arrangement between parties to the agreement. If there is a dispute in relation to certain parties of which one or more are not at all parties to the arbitration agreement, the best course of action is a civil suit only. It would be futile to waste time in initiating any arbitration claim. If the non-party, at the time of request for arbitration and at the time of establishement of arbitral tribunal does not object, one may argue that he has consented to be a party to the arbitration agreement. Conversely it is incumbent upon every non-party to object to his being arrayed as a party in any arbitration proceedings. Even at the stage of Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an award, a non-party could render the entire arbitration process unenforceable against him. Arbitration process involves convenience but cost. Therefore before initiating any proceedings, aggrieved persons must sit down and settle not only the nature of dispute and required relief but also the question whether the arbitration will work in respect of all those against whom an order or relief is proposed to be sought. On the other hand, if all necessary parties are parties to arbitration agreement, if a party fails invokes arbitration in relation to a dispute covered by arbitraiton agreement, Section 5 and Section 8 of the ACA will require any judicial authority to direct the parties to the suit or other legal proceeding to have their disputes resolved through arbitration, upon application by any party. Arbitration revolves around the agreement under which it gets initiated; between the parties to the agreement; and further that it is restricted to the subject matter covered by the arbitration agreement. Thus (1) arbitration cannot bind a non-party and (2) arbitral tribunal cannot travel beyond the scope of the agreement.      

ABATEMENT OF PROCEEDINGS UNDER SICA LEAVES STAKEHOLDERS IN A STATE OF QUANDARY

When secured creditors take any action under Section 13(4) of the SARFAESI Act in relation to enforce their security interest in a sick industrial company as defined under the Sick Industrial Companies [Special Provisions] Act, 1985 [SICA], the proceedings before the Board for Industrial and Financial Reconstruction [BIFR] abates by operation of law. The law does not envisage a formal posting before BIFR in order to declare that the proceedings pending adjudication by BIFR have been abated. Therefore the moment such an action takes place, the proceedings before BIFR abates. Abatement terminates proceedings without any bearing on the merits. BIFR by itself or AAIFR in an appeal cannot revive a reference that has got abated in pursuance of law. Abatement takes place instantaneously. It opens the floodgates for any person to initiate any legal proceeding which may be in the nature of a distress or winding up. The irony is that while secured creditors will have the last laugh, and if the company is not in winding up [as it would not be, being a sick industrial company], all other stakeholders will be in a fluid situation. This could enable the promoters to tie up or team up with secured creditors or even otherwise, and alienate the other valuable assets or rights and ditch the unsecured creditors / sundry creditors! In such a case legal system will only be a silent spectator. Even in respect of non-sick industrial company, if the company is not in winding up, if the secured assets of the company sold in auction due to an action under Section 13(4) of SARFAESI Act, such a situation would prevail. The only remedy in such a case would be to initiate any action for the winding up of the company and see if proceedings are necessary to be taken out under various sections dealing with fraudulent preference or misfeasance or other offences including falsification of books of account. Thus legal system leaves stakeholders in a limbo. The proviso under sub-section (9) of Section 13 of SARFAESI Act stating that in the case of a company in liquidation Section 529A would apply does not offer much assistance because that would also assist only if the company is in winding up. Therefore there is a good case for amending SICA and also SARFAESI Act to remedy this mischief!    

parties to private agreement could agree restrictive covenants relating to transfer of shares

The division Bench of the Bombay High Court holds that in a private agreement parties may agree to certain covenants restricting their right to transfer shares held by them in a public company and such restrictions are not hit by Section 111A of the Companies Act, 1956. Section 111A states that shares of public company are freely transferable.The division bench of the HC held in its decision dated 01/09/2010 that the expression "freely transferable" in Section 111A does not mean that the shareholder cannot enter into consensual arrangement/agreement with the third party (proposed transferee) in relation to his specific shares. The division bench delared that they do not accept the view taken by the single judge in the Western Maharashtra Development Corpn V Bajaj Auto Case dated 15/02/2010!