Stiff Registration Norms For Firms Likely Tightened

In a bid to tighten entry norms, the Centre is proposing to prescribe a minimum authorised capital threshold of Rs 1 lakh and Rs 5 lakh for incorporating private and public limited companies, respectively.

The threshold, which does not exist in the Companies Act, 1956, did not form a part of the recommendations made by the seven-member expert group which formulated the draft Companies Bill 1997.

At present, only the stock exchanges have listing thresholds in order to limit the number of companies seeking registration with them and to prescribe graded listing fee.

For instance, the Bombay Stock Exchange has set the listing threshold at Rs 5 crore while the smaller exchanges permit listing at lower levels.

 

Under the existing company law, a private company is differentiated from a public company on the basis of the number of shareholders and restrictions on the transfer of shares and the right to raise funds from the public.

At present, private companies are not permitted to have more than 50 shareholders. This excludes employee-shareholders and those who are ex-employees but continue to be its shareholders.

Private companies are also barred from raising capital from the public either through the offer of shares or debentures. Besides, if more than one member hold shares jointly they are deemed to be a single entity for the purpose of setting the ceiling on shareholders at 50 members.

As against this, company law defines any company which is not limited by these restrictions to be a public limited company. To differentiate between listed companies from unlisted ones, the expert group has divided public limited companies into public listed and public unlisted companies.

Further, the Securities and Exchange Board of India (Sebi) has been entrusted with the mamoth task of administering the fund-raising function of public listed companies.

The proposal to prescribe entry thresholds aims to curb registration of shelf companies that is, companies which are not meant to be operated immediately.

At present, on account of minimal registration fee, the number of companies registered with the registrar of companies ha s reache d 5 lakh.

Of these, around 85 per cent are private limited companies and the rest are public limited companies.

Of the latter, only about 6,000 are listed companies while the rest are public unlisted companies.

The proposal to restrict number has been circulated to the ministries concerned by the Department of Company Affairs to elicit views on the draft Companies Bill.