The Hindu Business Line : Resizing an elephant

Abraham Lincoln once remarked, “When you have got an elephant by the hind legs and he is trying to run away, it’s best to let him run.” Hopefully, the Government will not allow the elephantine Companies Act, 1956 to run away as it is but a few steps from condensing, simplifying and rationalising the behemoth Act. The Companies Bill 2008 has obtained Cabinet approval and only Parliamentary approval is needed. Past attempts to simplify the Act have merely b een muted attempts. There was a crying need to take a hard look at the 660-odd sections of the Act, together with the plethora of Schedules.

The proposed changes

The Bill, as it stands today, makes some major alterations to the present Act. It provides for the appointment of a minimum 33 per cent of independent directors on company boards and places restrictions on deposit mobilisation from the public. It prohibits issue of shares at discounts to end the current practice of promoters issuing shares to themselves at a discount. Besides, it recognises the chief executive officer (CEO), chief financial officer (CFO) and company secretary as “key managerial personnel” and provides for a single forum for mergers and acquisitions.

To protect shareholder interest, the new Bill seeks to ensure that the right of investors over dividend or security lying unclaimed for more than seven years is not taken away. In this regard, the investor education and protection fund would be administered by a statutory authority. It seeks to make provisions for inspections and investigations while including provisions of recovery and disgorgement. For small companies, it proposes a new entity in the form of a one-person company and empowers the Government to simplify the compliance regime for them.

Alongside, it provides a wider choice on the number of partners in a firm, including banking companies, with a maximum limit of 100. While there are no restrictions on the number of subsidiaries, it proposes to make mandatory the consolidation of financial statements. For an accounting firm the existing limit of 20 partners would be removed. In tune with changing technology, the Bill endorses video-conference board meeting and voting through email. It proposes to remove Section 211 of the existing Act, in which companies disclose a break-up of the inputs used, and instead call for the total figure. Shareholders, or groups of them, get more teeth as the law would permit class action suits.

Why the delay?

Much has happened since the reforms were first proposed. For one, Clause 49 of the Listing Agreement in India has been up to speed with the international trends and has provided for many a disclosure norm. Although the effort to bring about this law is praiseworthy, the delay nullifies the entire effort. India, having decided to adopt (or converge with) International Financial Reporting Standards (IFRS) from 2010, should expect that the amendments to Schedule VI of the Companies Act and its other provisions are made at the earliest instead of waiting for half a decade.

Small and medium enterprises (SMEs) get disclosure and other concessions even under the IFRS regime. This is one elephant that we cannot permit to run away.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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