"This is too severe and harsh a measure and should be withdrawn with immediate effect," Ficci said in a communication to the finance minister and the minister for law, justice and company affairs Arun Jaitley as also secretary, Department of Company Affairs, V Govindrajan.

The Companies (Amendment) Act, which came into force on December 14, 2000 has introduced a draconian provision in section 274(1), Ficci said.

This is all the more so, when two new sections viz 58AA and 58AAA have also been added in the existing provisions to protect small depositors. A number of restrictions have been prescribed in the existing provisions for companies which intend to raise public deposits.

Ficci has said that in case the provisions pertaining to public deposits and disqualification for appointment of directors have to be retained, it should be clarified that section 274(1) will only have prospective application and will not be retrospective in effect.

The chamber said that the harshest provision is that every director of a public company is liable to punishment by way of imprisonment upto three years and a fine of Rs 500 per day, if the company defaults in repayment of small deposits of Rs 20,000 or less. Moreover, section 58AAA has made offenses under section 58AA as cognisable and the police can arrest a director or officer of defaulting company without warrant.

Ficci also stated that several companies do make losses and a company may even become unviable and unable to pay public deposits due to a number of factors including exposure to competition, lowering of tariffs, uneconomic size or a change in technology.

Only such offenses as are committed knowingly and willfully or with a fraudulent intention should be severely punishable and punished speedily. Defaults by an oversight or unintentional negligence should not be subjected to such onerous provisions, it added.

The chamber said that public deposits are a popular and efficient method of financing the medium term financial needs of companies. Keeping this aspect in mind, it is necessary to create an atmosphere which enables such deposits to be freely invited and accepted, though in view of the considerable past defaults made by companies, an optimal risk-reducing strategy needs to be evolved.

The focus of this strategy should be to make it more re-assuring for the depositors to invest in company deposits while avoiding acute stringency that would only drive away companies from this source of financing all together.

Ficci mentioned that such deposits are unsecured and consequently the inherent risk is greater than for secured creditors. Public deposits should be treated at par with secured creditors.

Ficci has further said that there is no need whatsoever to disqualify a director from acting as the director of other companies as this is totally uncalled for.

Ficci said that once the company defaults, the directors of such companies cannot seek re-appointment. It should be clarified that the provisions of this section will not apply to directors who are being re-elected on retirement by rotation or re-appointed immediately on ceasing under sections 260/262 of the Act, in the same company, which has committed a default, as otherwise a situation may arise that the defaulting company may be bereft of any director.