The Hindu Business Line : What a leaner law means

THERE is a Malayalam saying that asks, "If the elephant become thinner, can you tie it in a cowshed?". As a corollary, one can ask: If the Companies Act become thinner, would the law become less complicated? If one goes by the `Concept Paper' given to the Government , with a few changes, company law can become less complicated.

The Paper brings out the myriad attempts at simplifying the Companies Act. From birth in 1956 till date, the Act has been amended not less than 24 times. Radical attempts were made by the Sachar Committee in 1988 and the Eradi Committee in 2002. The 1993 and 1997 attempts to get the law passed through both houses of Parliament failed for reasons that we will never come to know.

The latest avatar of the Act promises to reduce the number of Sections in the Companies Act from 781 to 289 and the all-important Schedules from 15 to a "few". While the prominent Sections — such as issue of capital, accounts and audit, directors, meetings, charges, oppression and mismanagement — remain (albeit in a condensed form), antique provisions such as appointment of sole selling agents, and so on, have been proposed to be deleted.

The paper does recommend a few heart-warming measures. A "combo" Form for the present Forms 8, 10, 13 and 17 is proposed along with an increase in the timeframe to file these documents with the Registrar of Companies to 60 days. Amendments are proposed to permit holding of annual general meetings (AGMs) on Sundays and public holidays.

The much-maligned "statutory meeting" that public companies are bound to hold is proposed to be removed since nothing of importance was ever happening at these meetings. Ever since the Naresh Chandra Committee Report, auditors have been expecting a "negative list" of services. The Concept Paper says that a list of non-audit services has been planned. A Chief Accounts Officer is to be responsible for the authenticity of the financial information of the company. Amongst other provisions, a person can be a director in a maximum of 15 companies while the definition of " independent director" is as proposed by the Naresh Chandra Committee.

Even so, a lot more can be done. Section 53 proposes to force all companies to adopt the Accounting Standards issued by the National Advisory Committee on Accounting Standards (NACAS). This provision would need a second thought. With Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) becoming mandatory and covering all major areas of activity of a company, the need for another Association to frame Accounting Standards for companies seems utopian.

The Accounting Standards issued by the Institute are going through varied interpretations, which only goes to show the complicated nature of these Standards and the need for one body to frame them. The need for continuing with the provisions regarding oppression and mismanagement cannot be fathomed.

Courts in India have given various verdicts regarding oppression and mismanagement. The Paper could have taken the logic of these decisions and converted them into law to prevent further disputes.

When the emphasis is on simplifying the law, devoting 20 Sections to a separate class of companies called `Producer companies' seems irrelevant. While the search for the definition of producer company takes us back and forth between Sections with no tangible result, producer has been defined to be "any person engaged in or connected with any activity related to primary produce". Primary produce has been defined to include agricultural products, handlooms, and so on. All other provisions applicable to other companies apply to producer companies too. There are a few special provisions too. A producer company can never become a public company. The first annual general meeting (AGM) of a producer company is to be held within three months of the date of incorporation. One wonders what business can be conducted at this meeting save for probably discussing the latest prices quoted on the multi-commodity exchange. These companies are to have CEOs and an internal audit system. Cut-offs could have been provided for these provisions since many a producer company may not be able to afford these services.

Another worrying note in the Concept Paper is the constant reference to Rules. It is stated that provisions relating to availability of name, procedures for raising of capital, list of non-audit services and provisions regarding independent directors are to be provided in the Rules. One hopes that the 492 sections proposed to be removed do not find their way into the Rules.

(The author is a Hyderabad-based chartered accountant.)

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