Introduction
In my previous article titled “Books of account under Section 209 of the Companies Act, 1956" a detailed analysis of Section 209 was made. As a sequel, I intend to cover the provisions of Section 209-A which deals with inspection of books of account and its connection with Investigation.
Background
Section 209A was inserted by Companies (Amendment) Act, 1974 i.e.01.-01.1975. In Section 209 the emphasis is laid on maintenance of proper books of account at the Registered office to reflect the true and fair view of the state of affairs of the company whereas in Section 209A emphasis is on inspection of “books of account and other books and papers.
Books of Account and other papers open for Inspection
Section 209A (1) states that the books of account and other books and papers of every company shall be open for inspection during the business hours by the following persons:-
· The Registrar of Companies or
· By any officer of the Government authorised by the Central Government in this behalf or
· By any officer of authorised by the Securities and Exchange Board of India in respect of matters covered under Section 55A
Companies (Amendment) 2000 amended Section 209 A and enlarge the scope of inspection of books account to facilitate investigation by SEBI
What is the objective of Inspection?
Inspections are carried out to check the compliance of the Companies Act provisions and also to verify that there is no evasion of taxes payable to the Government. It also safeguards the interests of shareholders and third parties such as creditors and Bankers/ FIs
Difference between Inspection and Investigation:
Inspection of books of account u/s 209A may take place as a routine exercise. Some times it may lead to investigation, if any fraud is detected on the complaint of ROC or Shareholders or creditors. But investigations are always carried out on receipt of complaints /detection of frauds/mismanagement and on the basis of reports of mismanagement or frauds committed by officers of the company.
Prior to insertion of 209A, investigations were carried out u/s 235 and 237. Investigation u/s 235 may be ordered by Central government on the basis of report from Registrar of Companies u/s 243(6) or (7), while investigation u/s section 237 is carried out, if the Company by special resolution and High court by its order declares that affairs ought to be investigated.
The Judgments of Supreme court* have held that the power conferred on the Central Government under Section 235 as well as under Section 237 (b) is a discretionary power; whereas the Central Government is bound under Section 237 (a) to appoint one or more competent persons as Inspectors to investigate the affairs of a company*{Barium Chemicals Ltd. and another,Appellants Vs Company Law Board &Ors AIR 1967 SC295 * Rohtas Industries Ltd Vs S D Agarwal AIR 1969 SC707}
Pre conditions for an investigation:
Before the Central Government can take action under Section 235 certain preconditions including those specified in Section 236 have to be satisfied. Sections 235 and 236 make it clear that the legislature considered that investigation into the affairs of a company is a very serious matter and it should not be ordered except on good grounds.
Section 209A (5) gives vast powers to inspectors and inspection can be ordered arbitrarily, whereas investigation has to be justified by the Central Government in case it is challenged by the companies. Once a report is given by the Registrar of company’s u/s 234(6) or (7), Central Government may appoint one or more inspectors to investigate into the affairs of the company and such inspectors make a report to the Central Government. The procedure for the appointment of inspector and investigation are elaborated in Section 235 and 237 of the Companies Act, 1956.
Inspection / investigation account by High court’s order
Inspection of books of account u/s 627 may also be ordered by the High court on the application of public prosecutor or company prosecutor or the Regional director (central government) authorise such person to inspect books of account for the purpose of investigation. Readers may note the difference between investigation under section 235 and 627. Section 235 empowers investigation against both past officers as well as present officers whereas investigation u/s 627 is always against present employees. Readers may refer to Section 240(6) which clarifies the expressions “ officers and other employees” used in that section.
Duty cast on Directors/other officers/employees
A duty is cast on every director of the company, other officers or employees of the company to produce to the inspecting officer all books of account and papers of the company in their custody at the place and time intimated to them{Section 209(2) and(3). The sub section uses the words “other officers/employees. What is the difference between these two words? It covers even officers who were officers at the relevant point of time but ceased to be officers subsequently. The above persons shall also furnish any statement or information or explanations relating to the affairs of the company.
The inspecting officer may insist for such of books of account or other papers he may feel necessary for the purpose of his inspection or investigation. Sometimes they affix seals or signatures on the books of account or papers inspected by them to notify inspection by them of such records.
Is Notice of inspection mandatory?
Proviso to Section 209A states that inspection can be carried without any prior notice to the company or its officers. Obviously inspections u/s 209A without notice are carried out only when it comes to the knowledge that fraudulently business is carried on with an intention to defraud creditors, shareholders, evade payment of taxes to government.
But in the case of routine inspections u/s section 209-A, the company will be intimated about the likely date of inspection and preliminary information will be asked about the company such as Memorandum of Association, Articles of association, balance sheets, names of directors and Secretary, promoters or key officers of the company etc. These inspections provide input to assess the quality of management, compliance with laws and to check the effectiveness of Auditors.
Powers of inspectors
Section 209(5) starts with a non obstante clause which over rides the provisions of all other acts which may be contrary to the power given under this sub section(5). In other words, their powers are supreme. Inspecting officers shall have the same powers that are vested in a Civil Court under the Code of Civil Procedure, 1908, while trying a suit. By exercising this special power, inspector can call for discovery and production of books of account and other documents, at such place and such time as may be specified him.
If required summons can be issued by the inspectors for compelling attendance /appearance or for examining them on oath just like a court.
If any officer is inspecting under the SEBI Act, he shall have the same powers that are exercised by Registrar of Companies under the Companies Act {Section 209(7)}.
What are the duties of inspecting officer?
The inspecting officer is required to give a report to the Central Government in the case of routine inspection u/s 209A and such reports are to be placed before the parliament by the Department of company affairs. In the case of investigation u/s 235 and 237, the Inspectors have to submit their report on the affairs of the company to the Central Government. In the case of inspection by SEBI u/s 55 of the Companies Act, to the Securities and Exchange Board of India in respect of inspection made by its officers (Subsection 6 of 209A).This power is exercisable only in respect of listed public companies so far as they relate to transfer of securities and non payment of dividend.
What are penalties for violation?
If default is made in complying with the provisions of Section 209A, every officer of the company who is in default shall be punishable with fine which shall not be less than fifty thousand rupees and also with imprisonment for a term not exceeding one year. The Companies Amendment Act 2000 has increased the fine amount by ten times of previous limit of fine
Is violation of Section 209A serious?
Yes it is very serious as the officer convicted of the offence under this section shall on and from the date on which he is convicted shall be deemed to have vacated his office and he will also be disqualified from holding similar office in any other company for a period of 5 years from the date of his conviction..
G.S Rao,Chief Manager(Legal)OCL India Limited
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