-CS Saibal C.Pal, Advocate*

Saibal C. PalIn 2013 and 2014 Ponzi Virus attacked companies and brought them down to their knees. Public at large were see to suffer. There were deaths, hue and cry all round. Governments stood shaken. Supreme Court had to intervene. About 200 plus companies were named having engaging money circulation schemes without SEBI registration which is mandatory. Such companies raised crores of rupees from the public promising high returns under varied names and schemes . Unfortunately, more than half of such companies were from eastern Indian states. Money raised from investors was in the name of tour and travels, hotel , realty projects, host of other subjects. Money was raised through agents in a clandestine manner with the promise of high return. Agents went all out to collect money luring the rural base. Companies paid agents high commission for the collection. Not all funds were deposited with the company and the companies paid interest out of capital. Also companies did not account for all the money received. The companies did not have business activity worth the name with the money raised. The above were all companies regulated by the Companies Act,1956.

The teeth of the act failed check the operators who utilized company as the face for their activities. The objective was to usurp public money in an organized manner under the shield of law. The Companies Act,1956 had grown old. It became feeble having faced such onslaughts which was nothing new. Several scams took place and the Act was amended by deleting some provisions and adding new provisions. A stage had come when it was found that the Act was too sick to handle the onslaught. Steps to replace the act started and the first Company Bill was place in the Parliament in 2008 and finally was passed in 2013.s So we have the Companies Ac,2013.

Our discussion is not on the Companies Act, 2013 but on the Ponzi Virus attack on companies. Trying to find the root of the problem. How it damaged the economy and how such things should be avoided. History teaches us not to repeat mistakes. The Companies Act, 1956 was enforced in all states except Nagaland in part and Sikkim. Before finally the Companies Act,1956 was replaced in part by the Companies Act,2013 the position of the Act was similar to the position of Emperor Bahadur Shah Zafar in 1957 before he was exiled in Burma to die a sad lonely death there. Any one did anything and everything by utilizing the Act. So a special acts were passed through ordinance , enactments and amendment of existing laws. RBI,SEBI,IRDA and other authorities became pro-active, though late. Had they acted earlier the damage to the economy could be arrested.

The Companies Act,2013 has tried to plug loop holes and only implementation will prove its success.

Promoters did all the damage by utilizing the Act for their own gains and gain for all those connected with them. For listed companies SEBI tried to arrest the rot by tracking promoters of vanishing companies. But unlisted companies failed to check the tricks of the promoters through the controlling authority Registrar of Companies (`RoC’). In West Bengal, Orissa and North east RoCs were silent spectators. By registering companies with shady designs they bought the economy to the knees. How their role is escaping attention is not known. Either the professional competence of the RoC and his team of officers are questionable or their designs need probe. In RoCs machine they work together. They are not independent. Machine says one thing and the manning does something else. If one starts with name application the rot will be detected. Own theories which have no market relevance or legislative intent rule. This continues to escape attention. However, stringent laws come to force unless the implemention is not not closely monitored Indian companies under MCA will continue to be a pain to the economy.

During the last few years it was observed that market practice changed age old laws and practices. Term money market changed. By money market in eastern India it meant instruments of the companies affected by ponzi schemes not short term, less than one year, Government Instruments like Treasury Bills, Municipal Bonds. The word , `chit fund’ defined in the Companies Act,1956 meant companies operating ponzi schemes. Companies in south India operate Chit Fund schemes successfully. But the word chit fund creates shudders in eastern India. `Chit Fund Companies’ are dreaded by the public as `Bargis’ of the fifteen and sixteen centuries. `Bargis’ were pirates who looted the banks of the river Hooghly.

On examination there a few interesting revelations. Ponzi virus found favour with companies and promoters starting with the letter `S’. West Bengal was affected by the ponzi firm, Sanchaiyata’ promoted by a person whose name started with the letter `S’. Sanchayita was not a company. It was a firm. It shook the economy of the country. Then there is the company, `Shardha’ and its group of companies promoted by Sudipto Sen. `Sahara’ group of companies is promoted by `Subroto Roy’. Names connected with ponzi companies are Sadananda Gogai, Srinjan Bose all starting with the letter,`S’ . To check ponzi activities Government of India set up the Securties and Exchange Board of India (SEBI) which starts with the letter,`S’. Other companies involved in such activities start with other letters but the letter `S’ is connected with leading companies. The money was raised through schemes again starting with the letter, `S’. So the letter `S’ is ponzi virus prone. SEBI and the Companies Act,2013 are the anti virus introduced to check ponzi virus and save investors and economy.

The Companies Act,1956 underwent changes and notable among the several amendments was the Companies (Amendment) Act, 2000. The act amended S 43A with effect from 13.12.2000 . Provision in the earstwhild S 43(1A) of the Act stated that if not less than 25 per cent of the paid up share capital was held by a body corporate in a private limited company then the company would automatically become a public limited company. Further if the turnover of any private limited company irrespective the size of paid up capital exceeded on an average of the financial the results of the three consecutive financial years of Rs 25 crore or more the company would automatically become a public limited company and the private limited company would delete the word,` private’ from its name.

The Amendment Act of 2000 also amended S 67 by insertion of the provisio to S 67(3) that offer or invitation to subscribe for shares or debentures is made to fifty persons or more then the offer would be to offer to the public and would have to make a public offer as per SEBI Regulations.

So earlier to 13/12/2000 actions of private limited companies were restricted. If they grew in terms of capital with body corporate participation in capital and turnover over a certain figure, then it would automatically become a public limited company. On conversion to a public limited company, many relaxations applicable to private companies would not be available. Such a restriction was required. That is why the legislature had incorporated the provision in the Act in 1974.

Promoters found out the flaw and took advantage of the amendment of S 43A with effect from 13/12/2000 and took advantage of the relaxation. Private limited companies took advantage of the new found liberty with the lifting of the restrictions in the provisions of the earlier S 43(!A) of the Companies Act,1956. Facts reveal that he amendment of the above provisions caused more harm than good to the public and the economy.

The Companies (Amendment) Act,2000 inserted the provisio S 67(3) to the Companies Act,1956 restricting the   number of persons from whom a company could raise fund at a time to fifty . Ponzi virus affected companies found ways to avoid the restriction by raising funds in tranches. Thus promoters of such companies encouraged avoidance of the proviso rather than adhering to the provisio. SEBI reacted to the misuse of S 67 (3) and the provisio but late. After the Companies Act,1956 is redundant in part. SEBI is citing S 465 of the Companies Act,2013 to flog a dead horse. Reminds me of Kazi Nazrul’s words,` Jibane jare dao ni mala morone keno dite gale phool,’ meaning `why have you gone to give flowers to a person when you did not give flowers after his death when you did not recognize him during life time’.

SEBI has been trying to track unlisted companies to have been affected by ponzi virus by referring to the Sahara Case drawing reference to S 55A of the Companies Act,1956 in 2014. It reminds me of the year 2003 when my Education Guru (Teacher) ( Late Justice Ajit Kumar Sengupta, Judge Calcutta and Allahabad High Courts) which section links the Companies Act,1956 and the SEBI Act,1992 ? After spending much time (though I had spent more than 10 years dealing Companies Act,1956 and SEBI Act,1992 together) I referred S 55A. I mentioned of S 55 in the book on Notice (published and revised by Eastern Law House,Kolkata in 2003 and in my book, `In Corporate’ published in 2012 though the article was first published in 2005. My head bows to my Guru with reverence and the person who took me to him, Late Chandranath Mukherjee, Advocate ( Supreme Court & High Court, Calcutta), one of my all time great well wishers. My heart is partly emptied for being able to draw reference to them. Had they not come in my life, I would not have been able to write this article for you.

The Companies Act,2013 has come into force in part. To over come the mistake of the Amendment Act of 2000 the private companies are treated as public companies and many exemptions enjoyed in the earlier act has been withdrawn. To overcome the need for exemptions in respect of such companies, `small companies’ and `one person’ companies have been introduced in the new Act, More sections of the Companies Act,2013 are awaiting to be made effective. SEBI is amending its regulations each day. At the same time public fear of investment in companies particularly in the retail investors segment has not gone. It is expected the effort of the legislatures to make companies save havens for investment for economic advancement will prove fruitful.

Copyright & Publishing right with Author- Edited by : Soubhik Chakraborty, Advocate.

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  1. Ashish Gupta says:

    I believe QNET India is not a ponzi scheme…it is well established channel of Distribution of Goods & services with a full proof model to payout its business partners since everything is very much transparent…the negative news is because of the lack of clarity on the laws applicable on business activities carried out by such companies since India has no law on Direct Selling Companies…Act which prohibit money circulation or Chit fund never applies on these companies anyhow its the courts who have to decide what law will apply in such cases.

  2. Prasad says:

    I read the entire article with curiosity to know whether the Author covered the activities of Q-Net India which is still prevalent in India. It will be of great help to general public if someone confirms whether the Q-Net India business is genuine and legally valid particularly in India. There are numerous negative news appearing in the Web. I wrote to SEBI, MCA but I have not received reply.

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