The Hindu Business Line : Wrinkles that need ironing out

One of the welcome recommendations is to do away with the need for obtaining Government approval — be it managerial remuneration, the appointment of relatives of directors, or transactions between directors/their relatives and the company. In fact, it has recommended that there should not be any limit for managerial remuneration.

The Committee is of the view that the areas which, at present, require Government approval should be left to be decided by the shareholders with adequate safeguards.

It remains to be seen whether the Government will be receptive to these recommendations or give effect only to a select few, that too partially, and leave out a majority as has been the case with many of the recommendations made in the past.

Deficiencies

Notwithstanding the progressive views of the Committee on the subject, the report suffers from certain deficiencies:

"Shareholder democracy" enunciated in the report empowers shareholders as the ultimate body to approve those subjects which, at present, require the approval of the Government. However, the rights of proxies who are appointed by the shareholders to represent them at the meetings have not been enhanced.

The following provisions have been left untouched:

i) proxies do not have right to speak at the meeting or vote otherwise than at a poll;

ii) the presence of proxies are not counted for the purpose of quorum; and

iii) proxies are required to be deposited with the company at least 48 hours before the time appointed for holding the meeting.

These provisions need to be amended so that:

a) proxies present at the meeting are counted for quorum purpose provided that at least two shareholders in the case of a public company are present in person;

b) proxies may vote by show of hands in addition to their right to vote on a poll; and

c) proxies need not be deposited with the company before the meeting; and proxies be allowed to attend the meeting by depositing the instrument of proxy at the meeting.

Even if the proxies are not allowed to speak at the meeting, they should be given these powers so that the original shareholders get a right to exercise their right at the meeting through the proxy they appoint and "shareholder democracy" is put into practice in a true sense.

The bias against the small shareholders is brought out in that Section 257 of the extant Act which allows a person to give nomination for appointment as a director on depositing a sum of Rs 500 with the company is proposed to be hiked to Rs 10,000.

It should have been realised that mere nomination does not guarantee the election of a nominee and if it does not get the required support at the meeting, it is defeated.

Similarly, in the case of mergers/amalgamations the objections of dissenting shareholders irrespective of their size of their shareholding, are entertained by the courts, although in most of the cases, the frivolous ones are dismissed.

The Committee has recommended that a minimum level of shareholding should be prescribed in the Act to be eligible to object, so as to prevent frivolous objections.

It is wrong to presume that any objection from a small shareholder is vexatious and frivolous and, therefore, to prescribe that unless a shareholder holds a minimum number of shares he should not have such a right to object goes against the interest of the shareholders.

It should be left to the courts to decide the merits of the objections rather than totally deprive shareholders of their right to object a scheme.

In the definition of independent director, the term "promoter" has been referred to, but such a term has not been defined in the report; nor does it refer to any definition on this term in other pieces of legislation.

The compulsion to appoint a managerial personnel under the extant Act is applicable to companies with a paid-up capital of Rs 5 crore and above. This is recommended to be amended to become applicable to companies with a paid-up capital of Rs 10 crore and above.

It is surprising that the Committee has resorted to tinkering with the provisions by enhancing the threshold limit rather than leave it for the management/shareholders to decide on the need to have a managerial personnel.

Like small and one-person companies, joint venture companies too deserve exemption from certain provisions since the ownership of the entity is restricted to 2-3 shareholders, who are parties to the agreement that deal with the terms of the management of the entity, the rights and obligations of each such shareholders and the terms and conditions relating to the transfer of shares of the entity.

These, in majority of the cases, have to be public companies since a subsidiary of a public company cannot have the status of a private company, and further because Section 297 requires the prior approval of the Central Government for any transaction between a public company and a private company having a common director.

Since no public shareholding is involved, these companies should be treated on a par with small companies and exemption should be allowed from many of the provisions, including but not limited to the following:

a) The need to propose a person as a director along with the deposit of the prescribed amount under Section 257. It is improper to make it compulsory for the nomination for the appointment of a director to be made by any person when the shareholding is limited to a few persons and the JV agreement prohibits the appointment of any person other than those nominated by the JV partners;

b) Permitting the holding of general meetings even abroad when one of the shareholders resides there and such companies having the option of holding the general meetings.

c) Exemption from the need to appoint audit committee. Similarly, unlisted public companies which do not accept public deposits should be treated on par with private companies, thus granting them all the exemptions that are available to a private company

In other words, the classification of companies should be based on:

i) the size of the organisation — whether based on the number of shareholders or the assets of a company;

and ii) listing status — that is, listed companies and unlisted public companies, and the rules as to the exemptions available to the different class of companies should be clearly formulated

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

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