The Hindu Business Line : Give the small its due

AMIDST speculation as to when the contents of the Irani Committee report will see its logical end there is a heated debate on the issue of independent directors and also the criteria to be adopted for small companies. The Companies Act, 1956, with all its changes and modifications over the years has exposed small companies to almost the same set of regulations as their bigger counterparts.

There is already a feeling that the cost of compliance for small companies is so enormous that in today's competitive environment the need to get out of strangulated provisions, largely procedural in nature, can be dispensed with f. The question is how to ensure good governance for small companies with minimum regulation.

Family managed companies are run as large-scale businesses and, in some cases, even as small companies, some of which do not have access to public funds or bank borrowings. They may be incorporated as a company for various other reasons and rightly require flexibility in regulations to conduct their business effectively.

The Naresh Chandra Committee report rightly took a stand that "private companies which employ public money to an appreciable extent should be subject to the same restrictions and limitations as to disclosure and otherwise as applied to public companies."

Quantity vs quality

With so many companies to supervise, the Department of Company Affairs is obviously weighed down by sheer volume. Clearly the need is to undertake an ABC analysis in the matter of supervision and investigation. Disclosure requirements, governance issues and procedural aspects are to be commensurate with the size of the company and the nature of its operations. Public limited companies with global business presence need more accountability and transparency in operations.

This is exactly the posture taken by the recent committees dealing with the subject of disclosures. Various accounting standards have also laid down "turnover criteria" as the benchmark for adoption by enterprises. One may argue that governance and playing the game by the rules are issues of mindset and not one of regulation. But when it comes down to actual operations, the ground rules change dramatically.

Small companies

The Irani Committee report in para 4 states thus: "The Committee sees no reason why small companies should suffer the consequences of regulation that may be designed to ensure balancing of interests of stakeholders of large, widely-held corporates. Company law should enable simplified decision-making procedures by relieving such companies from select statutory internal administrative procedures. Such companies should also be subjected to reduced financial reporting and audit requirements and simplified capital maintenance regimes. Essentially, the regime for small companies should enable them achieve transparency at a low cost through simplified requirements. Such a framework may be applied to small companies through exemptions, consolidated in the form of a Schedule to the Act.

"Law could also consider an integrated approach whereby a deregulated framework for private companies may be provided, which may also apply to small companies. However a definition of small companies may be considered for enabling such a regime. There are bound to be problems associated in prescribing size. In our view, size may be assessed on the basis of gross assets comprising of fixed assets, current assets and investments not exceeding a particular limit as also turnover. Since the definition of "small" may change over time, this may be done through rules.

"To qualify for exemptions, a small company should however neither be a holding nor a subsidiary of any other company. However, the Committee does not feel the need for providing a special internal governance and constitutional regime to small companies. This is likely to come in the way of their future growth. Instead the Committee recommends enabling of new vehicles for business, such as limited liability partnerships, through separate legislation, if necessary.

"Associations, charitable companies, etc., licensed under Section 25 of the existing Companies Act should not be treated as small companies irrespective of their gross assets.

"The law should provide a framework compatible to growth of small corporate entities. Exemptions should however facilitate compliance by small companies in an easy and cost effective manner. These should not incentivise concealment of true size by any entity or be a barrier to growth of small companies."

Thus, the time has come to have an exclusive chapter dealing with small companies. It is better to take the bull by the horns than make cosmetic changes in the existing Act, providing for few exemptions in the respective sections for small companies. There is a need to overhaul the definition of private and public company, which in today's context has become dated.

As rightly observed by the Naresh Chandra Committee, a private company dealing with public funds is more public than a public company not having access to public funds. This should be the basis, and not merely having restrictions on the number of members and transferability of shares.

Coming to administration, it is better that independent wings in the department monitored and supervised the progress of small private companies, and a separate specialised wing, the functioning of public companies. This alone, and not superficial distinctions in law, will ensure proper implementation of the legislation.

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

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