The new Companies Bill aims to put a check upon the “Vanishing Companies”

Government aims to put a check upon the The new Companies Bill seeks to promote class-action suits for corporate frauds. The bill has been passed by the Lok Sabha  in the year 2012. The proposed law was being formulated since many years.  The government of India is making rules to implement the law including imposition of fines and penalties.

Object of the bill:

The aim of the bill is to stimulate transparency and ensure some regulations, proper reporting by the companies and disclosures by them. The bill seeks to impose higher accountability for the corporate auditors. It has the objective to protect the interest of the investors.

The concept of “vanishing companies”:

The concept of “vanishing companies” is remarkable to India.  The number of such companies deceiving investors and in the process earning crores of rupees is alarming which requires attention.

The root of this hazard can be traced to the early nineties when the government abolished the office of the Controller of Capital Issues (CCI) and asked the Securities and Exchanges Board of India (SEBI) to supervise the capital market.

Many promoters taking advantage of this raised huge amount of money and the role of SEBI was nothing but a spectator.

Thousands of companies and promoters raised money from the public and thereafter vanished. They could not be traced later on. These companies have disappeared after gathering thousands of crores of rupees.

Types of “vanishing companies”:

There are two kinds of vanishing companies, the first one is which has an existence, an office, but trading has been suspended by the stock exchange. Though, officially such companies may not be referred to as vanishing companies, but the funds of the investors have vanished. Many such companies do not respond to communications and/ or complaints from the investors.

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Effects of the “vanishing” of the said companies:

Due to very little supervision from SEBI and the stock exchanges where the companies got enlisted, many companies simply disappeared, in no time, leaving the investors dry.

The new law:

The new Companies Bill aims to provide better shareholder democracy. It gives power to the investors to sue a company for “cheating and mismanagement” for compensation and damages.

Highlights of the Bill:

The Bill proposes to make the laws relating to raising money from the public stricter. It is going to set up one forum for approval of acquisitions of domestic or foreign entities. The Bill is also going to restrain insider trading by companies declaring those activities as illegal amounting to offence punishable under the penal laws.

To control the illegal acts of vanishing companies, under the new law, each director would be provided with a Director Identification Number making their tracking easy. It is going to make it mandatory for all companies to have 33% directors.