- (1.) The Indian Companies Act, 1913, which was extensively amended in 1936 and thereafter further amended from time to time, called for a drastic revision after the end of World War II. "Apart from the experience gained in the actual working of the Act, which threw up many points necessitating its amendment, large changes had taken place in the organization and working of joint stock companies, and over a wide sector that was dominated by new elements in trade and industry, the character of Company management had also materially altered. In many cases conventional methods of Company management were discarded in favour of less orthodox and more venturesome techniques which the existing Company law was unable to control adequately." (Report of the Company Law Committee 1952, p. 3). The lacunae in the Act left the way open to some business men to misuse and at times to pervert the provision of the law to serve their private ends.
(2.) So long as the Second World War lasted the pull of war economy on domestic production masked these malpractices but the end of the war exposed them to the full view of an increasingly critical public. Thus arose the demand for amendment of the Indian Companies Act particularly on the following aspects :- "(i) the manner in which companies were promoted and formed with particular reference to the law about prospectuses, minimum subscription and allotment of shares; (ii) the nature and scope of the control exercised by shareholders on the management of a company; (iii) the powers and functions of directors and the control exercised by them over the companies and their managing agents; (iv) the terms of appointment and conditions of service of managing agents and their powers and functions vis-a-vis the directors of a company and the general body of shareholders; (v) the powers of investigation and inspection conferred on Government in cases of gross mismanagement of the affairs of a company; (vi) the manner in which company accounts were kept and audited; (vii) the position of minority shareholders and the protection to be accorded to them; (viii) the rights of shareholders and creditors in winding up; (ix) the administration of the Indian Companies Act, including the need for an authoritative body to keep a close and continuous watch on investment markets." (Report of the Company Law Committee, 1952 p. 20). Emphasising on the necessity for adequate provision for inspection and investigation the Company Law Committee observed: "No Law however well conceived or well-drafted, can be altogether fool-and-knave proof and it is impossible for any law to protect the fool from the consequences of his acts or omissions. Nevertheless, we consider that it is the function of law to prevent dishonest and unscrupulous people from creating conditions and circumstances, which will enable them to make fools of others. The powers of inspection and investigation into the affairs of a company, which the Companies Acts of most countries confer on Government or a quasi-independent authority are intended primarily as a check on the activities of such people. We recognise that, in some cases, the use of the powers of inspection and investigation may, initially, tend to shake the credit of a company and thereby adversely affect its competitive position, although the allegations against the company may in the end be found to have been largely unfounded. It is, therefore, necessary that the investigation provisions of the Act should be so conceived as to reduce this threat to the credit of companies to a minimum. This risk should not, however, deter us from considering the desirability of conferring adequate powers on an appropriate authority to investigate the affairs of a company, where such investigation is prima facie called for. On the contrary, we consider it to be in the long-term interest of the trade and industry of this country that such powers should be vested in a competent authority and exercised energetically, albeit with due caution and fairness in all cases which require investigation." (Report of the Company Law Committee, 1952 p. 133).
(3.) The demand for drastic revision was sought to be met by enacting the Companies Act, 1956, which came into operation from April 1, 1956. The new Act has also been several times amended, during the first decade of its operation, so as to plug the holes and escape routes, as and when those came to notice. Sections 209(4) of the new Act contains provisions for inspection and Sections 235 to 251 contain provisions for investigation.;