The Hindu Business Line : Bittersweet fruits of incorporation

OF THE more than 10,000 listed shares in the Indian bourses, hardly a hundred are active. That makes it one per cent! And of the lakhs of companies on the registers of the Registrar of Companies (ROCs) hardly 5 per cent or so are functional. This is perhaps why the Department of Company Affairs (DCA) periodically conducts a de-registration drive, as it were, to weed out from its records companies that exist only in name. Majority of these non-performing companies belong to the family of private companies.

The company form of business organisation received a shot in the arm when the House of Lords, more than a century ago, in its celebrated judgment in Solomon vs Solomon, brought out in vivid detail the fact that a company is distinct from and independent of its dominant shareholders.

The verdict bolstered the confidence of wannabe businessmen who took heart from the protection it offered — you may practically control the entire company but your liability is restricted to what you have promised to pay it as a shareholder. This insulation from unlimited liability has often been misused by the unscrupulous both in our country and outside.

The staggering figure of non-performing assets (NPAs) of our financial system is sadly a reflection of the indulgence shown to the dominant shareholders of private sector companies. On the flip side, however, it must be granted that but for incorporation people with bright ideas sans capital would have languished. Company form of organisation helps mobilise huge amounts of public funds. At one point of time, Reliance took pride in not looking to development financial institutions at all and instead meeting all its financial needs from public. Perhaps this is why corporatisation along with privatisation has almost become a mantra in this country. The income-tax law encourages sole proprietors and partnership firms and stockbrokers to morph into a company by sparring them from liability to capital gains without realising the danger of unwittingly in the process cluttering another government department — RoC — with a flood of paper (RoCs have not yet attained the paperless status and distinction).

The constituency of professionals like lawyers and chartered accountants has largely remained immune from this fad because of the quaint expectation that a professional should meet his own bill for negligence if and when he commits one. It has not occurred to powers-that-be that unlimited liability has never been able to exact a limitless recompense from the delinquent professionals. The insurers are increasingly going to be saddled with this liability. This being so, there is no earthy reason to keep professionals out of the corporate loop.

It is not as if corporatisation has not been an unmitigated disaster in this country. For instance, the state behemoth BSNL, incorporated out of the amorphous and unwieldy Department of Telephones, is today giving some of the private telecom majors a run for their money.

As a department of the state it would have lumbered on. It has become nimble footed, a sine qua non for meeting competition, thanks to the freedom, albeit limited, enjoyed by it.

The experiment if extended to the world's largest employer — the Indian Railways — would bring even more dramatic results, aver the corporatisation enthusiasts.

The truth is corporatisation has worked reasonably well both in the private and public sectors when the entrepreneur meant serious business. Which may perhaps be a good reason for shutting out non-serious candidates, businesses with ridiculously low capital base.

The amendment made in 2000 calling for a minimum capital of Rs 1 lakh and Rs 5 lakh for private and public companies, respectively, was a good beginning. The limits must be upped from time to time.

Better still, the fruits of incorporation should be made available only to those who access public funds. Private companies are after all glorified partnerships. There is no reason why we should indulge them.

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

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