Promoters of shell cos won't get limited liability cover any more

NEW DELHI: Still have a few dozen itsy-bitsy shell companies with tiny amounts of paid-up capital? Be prepared to be taken to the cleaners. The Companies (Amendment) Bill ''03 proposes to remove the protection of limited liability for shareholders and directors of companies that do not have the minimum paid-up capital stipulated by the Companies Amendment Act ''00.
Corporate India is full of small companies that promoters use to carry out assorted financial skulduggery. Since the paid-up capital required to set up a company was ridiculously small, the Companies (Amendment) Act ''00 laid down that the minimum paid up capital of a private company should be Rs 1 lakh and that of a public company Rs 5 lakh.
Even though these amounts are small by corporate standards, many promoters have not bothered to raise the paid-up capital of their shell companies to the stipulated levels by the December ’02 deadline.
So a clause in the Companies (Amendment) Bill ’03 has proposed unlimited liability for directors, shareholders and managers of companies that fail to meet the paid-up capital requirement.
The proposed amendment will have ramifications on the 2.5-3 lakh companies which have not raised their paid-up capital to the stipulated levels.
The clause has been introduced to ensure that defunct companies and paper companies are soon wound up and deleted from the register of companies. This would reduce the burden on the Registrar of Companies and advance the cause of corporate governance, official sources said.
A large section of Corporate India has chosen to ignore the stipulation and continue to maintain several shell companies. Even the easy exit schemes of the Department of Company Affairs for a defunct company — the Company Law Settlement Scheme of ’00 and the Simplified Exit Scheme of ’03 — failed to achieve the desired objective.
Corporate India is predictably upset with the clause proposed to be introduced as a proviso to sub-section 5 of section 3 of the Act. Ficci sources say the proposal is not in keeping with the spirit of the Act which provides for limited liability to the shareholders of the company.
There are around 6.2 lakh companies on the Register of Companies at present, and at least, half of them are estimated to be shell/paper companies created by corporate houses for trading and investing in securities. According to government records, just about 500 companies are registered as companies with unlimited liability.