The Hindu Business Line : Oppressed by irrational dichotomy

THE Companies Act, 1956 has undoubtedly undergone a large number of changes during the last five decades and calls for a re-codification. But any attempt at re-codification will be a wasted effort unless the Government addresses itself to the issues which have to be sorted out before that exercise is undertaken.

The proposed codification will be half-hearted unless we are clear in our conception of the role of big companies in the capital market and review the need for and wisdom of the existing arrangements for regulating the administration of listed companies through the Department (Ministry?) of Company Affairs and SEBI. It will be incomplete till all the changes in law called for by the `economic development' in the country so far and also in the light of court pronouncements and the experience of the Company Law Board during the past 20 years are reviewed/considered and made a part of the process of codification.

Irrational dichotomy

The manner in which the Department of Company Affairs has been tossed between the Ministries of Finance and Law from time to time has been tragicomic. One can appreciate the concern of the Finance Ministry of the capital market. It will be obviously unwise to relegate the legislative and regulatory duties required for ensuring that the market is less unpredictable to the inherently unequipped Law Ministry. This is a responsibility which rests exclusively on the Finance Ministry.

But what is difficult to comprehend is the Ministry's reluctance/inability to come to grips with the problems thrown up by the company law administration fully and in their proper perspective and confining its interest to only some aspects of the performance of listed companies. For instance, the overlapping jurisdiction of SEBI (which is a creature of the Finance Ministry) and its bete noir, the Securities Appellate Tribunal (SAT), on the one hand, and the Department of Company Affairs and the Company Law Board (or its new version, viz., the National Company Law Tribunal (`NCLT'), on the other.

For one thing, many of the `offences' which have compelled SEBI to justify its actions before SAT can also be construed as acts of oppression against minority shareholders in the companies concerned by their controllers for the time being, including `insider trading', the promoters' trying to get away with fancy prices for transfer of their controlling interest in the `target' companies, leaving the minority shareholders in the lurch, and so on.

The fact that any offence has, under the Companies Act, been specifically identified and made liable for legal action under a different provision in the SEBI Act does not imply that the shareholders in minority could not proceed against the offenders under Sections 397 and 398 of the Companies Act though, as the Supreme Court has repeatedly stressed, a provision in a special Act ordinarily prevails over a general provision in an older statute not enacted for combating a particular class of offences.

The point is that there is no sense in two independent regulatory authorities exercising concurrent or overlapping jurisdiction in such cases. There is no reason why SAT should not be merged with the NCLT or in any case appeals against SAT's judgments should not go to the National Company Law Appellate Tribunal (NCLAT) instead of the High Court.

Among other things, some of the incongruities/anomalies in pay-scale, status, and so on, enjoyed by the members of SAT and those available to the NCLAT will automatically disappear if a single cadre is formed with different scales of pay for members, vice-presidents and the president. It may be noted that appeals against the orders of the NCLAT will lie to the Supreme Court under Section 10GF of the Companies Act, while appeals against the orders of the NCLT will be dealt with by the NCLAT.

It appears that the services of the High Courts are dispensed with for the purposes of the Companies Act. Should not the position be similar under the SEBI Act? Harmonisation is required not only in regard to appeals but also in respect of regulatory action in the administration of the Companies Act/SEBI Act. Why should the necessary coordination in the application of the provisions of the Companies Act to the cases of listed companies be effected by vesting officers under the SEBI with the powers of the Registrar and Regional Directors under the Companies Act, 1956? Disclosures in a prospectus or elsewhere, required to be made by directors, are of crucial importance for the administration of the Companies Act as well as the SEBI Act. It will be conducive to the efficiency of the officers of both the Departments, viz., Company Affairs and SEBI, if they do not function as watertight compartments. Officers of SEBI should be made to feel more `accountable' and must also widen their experience and expertise by being made to `learn' or become more familiar with the nuts and bolts of company law administration. They should eschew the temptation to consider themselves superior merely because they deal only with bigger companies.

Oppression and mismanagement

Reference to the provisions of Sections 397 and 398 of the Companies Act takes us on to their treatment in the draft Bill that gives flesh and blood to the conceptions of the DCA on the different aspects of company affairs. The subject of `oppression and mismanagement' which is covered by the existing Sections 397 to 409 of the Act, 1956 will be dealt with in two sections in a new Chapter XV.

The `draft Bill' adds a new Section 99 providing for `Miscellaneous Provisions' as a part of Chapter XV. The miscellaneous provisions include "employee's securities to be deposited in post office saving bank or scheduled bank", currently shown in Section 417, which will become sub-section (1) of new proposed Section 99.

"Provisions applicable to provident fund of employees" in the existing Section 418 will become sub-section (2) of the new Section 99. Two more stipulations are to be made through two sub-sections to Section 99. One is that no employee shall be entitled to receive, "in respect of such portion of the amount to his credit in such fund, as invested in accordance with the provisions of this section, interest at a rate exceeding the rate of interest yielded by such investment."

The other is that "an employee shall be entitled to obtain advances from or withdraw money standing to his credit in the fund in the manner as may be prescribed." The relevance of these subjects to Chapter XV, which is supposed to be on oppression and mismanagement in the proposed new Act, is far from clear. In any case the shifting of the existing Sections 418, 419, 420, 421, 422 and 423 as sub-sections of the proposed Section 99 not only gives the impression of `codification' flying off at a tangent but appears also to be a dubious way of reducing the number of sections in the Act.

Where a section is not transferred as a sub-section it is replaced by rules to be prescribed in due course. Whether or not the new Act and rules together are likely to make the `law' leader in reality, there can hardly be any doubt that the Act will have fewer sections. This is a good example of an optical illusion.

The CLB has been handing out the same prescription in most cases of oppression or mismanagement, viz., one of the fending groups buying out the other unless the assets/business undertakings of a company lend themselves to division/distribution on an acceptable basis among all the groups. This solution appears to be too facile and simplistic. Are there no other better or more satisfactory alternatives?

While it is true that the broad characteristics of `oppression' are similar it may assume many forms and its intensity and financial implications may vary from case to case. There can, therefore, be no standard formula or universally applicable panacea for all such cases. However, a principle from which there can be no deviation is that the oppressor cannot be allowed to enjoy the fruits of his oppression and the victim of his oppression ousted from the company merely because he does not have the resources to acquire the shares of the oppressor in the company.

The least that the law can do is to compensate him for the financial losses and the tension, humiliation and costs of litigation that he may have suffered by awarding equitable `costs'. It is essential that the existing provisions of Section 402 should be suitably expanded when the Act is redrafted/codified to make it clear that a victim of oppression will be entitled to appropriate restitution and damages in any form found practicable in the circumstances of the case. Section 402 does not provide for compensation in specific terms.

(By arrangement with Corporate Law Adviser, New Delhi.)

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