It was further provided that a private firm that has become public by virtue of that section can become a private limited firm only after taking the Centre's approval and after complying with other provisions of the Act.

However, there is no provision which provides for automatic conversion of such company into a private company nor are there any provisions which classify them as public. A fundamental issue is that such companies have been deemed to be public by a provision and now such provision does not have any more existence.

The definition of a private company is now sought to been amended by stating an additional condition which would have to be complied by all existing and proposed private limited companies to be classified as such. It is provided that a private company would mean any such company which has a minimum paid a capital of Rs 1 lakh or such higher amount as may be prescribed. Let us review the impact and implications.

Firstly, it appears that right at the stage of formation of a new private limited company, the paid-up capital will have to be Rs 1 lakh. Further, immediately on incorporation, to qualify as a private limited firm, it will have to allot the shares so as to ensure a paid-up capital of Rs 1 lakh.As far as existing private limited companies are concerned, the intention seems to be to give them a period of two years to enable them to increase their share capital. However, the drafting of the provisions leads to at least two possible interpretations.

It has been provided that a private company means a company having a minimum paid-up capital as specified. Thus, existing private companies not having such minimum capital would not strictly be treated as private limited companies at all. How they will be treated is an issue which has no sensible answer. In fact, the logical but, at the same time, an absurd answer is that such a company would be treated as a public company since the definition of public company is that it is a company which is not a private company!

However, really speaking, a close reading of that definition also strictly speaking does not enable their inclusion in that definition. Assuming that these legal issues are resolved by appropriate drafting, the question is, is it fair to mandatorily require even existing firms to hike their share capital to the minimum specified amount?

It has been provided that if a private limited company fails to increase its share capital to the specified amount, within the specified time of two years, it will be deemed to be a defunct company and its name shall be struck off from the register. This can be extremely harsh. That apart, a legal question that would survive is, what would be the effect on thousands of such companies whose name will in all likelihood be struck of? Note that these companies are not required to be wound up.

However, they would have no existence as per the register of the registrar of companies. A better course would have been to provide that on the new companies should have the prescribed minimum data capital.

Similarly, public limited companies are also required to increase their paid up capital to the minimum specified extent of Rs 5 lakh. The same problems that may be faced by private companies are also relevant here. As far as public companies are concerned, it makes sense requiring that they have the minimum paid up capital as specified. However, this results in a peculiar situation. If the public company is unable to reach the paid up capital as required within the period of two years, it also would be treated as a defunct company and its name be struck off from the register.

This is not only harsh but also illogical. It would have made more sense if such company were to be treated as a private company or it were provided that such company should be converted into a private company. This is because becoming a public company is a matter of choice and if a company does not want to have that status for which higher capital is needed, it should be treated as a private company which requires a smaller amount of capital.

Clearly, the provisions proposed in the Bill have requirements that will face significant practical difficulties and a review should be made of the provisions before their enactment.

The author is a Mumbai-based chartered accountant