The Hindu Business Line : Continuing controls in liberal regime

Economic legislation is meaningful only if it factors in the direction the economy itself is poised to take. This is particularly applicable to laws governing joint stock companies, as the corporate form of business is increasingly acquiring larger stakes in the overall economy.

In attempting to put in place new economic legislation, sufficient attention to detail must be given, both to the changing economic policy framework and the consequent development in the legal system as well.

In the past two decades, the economy has been witnessing progressive liberalisation, privatisation and globalisation in many spheres. Consistent with this approach, the country’s legal underpinnings have also been changing in many important spheres.

The one major area in the business realm that is long overdue for a thorough overhaul is the Companies Act. The existing law, , created five decades ago, is replete with many needless provisions. In the past decade, several Bills were introduced (in 1997 and 2003) to amend the Act.

The classic example of the legislators lacking business sense is reflected in the provisions with regard to directors of even private limited companies. For instance, remuneration to a relative in a private limited company needed the government’s prior clearance. So is the appointment of sole selling agent or entering into contracts with other companies. These matters are best left to the commercial judgment of the board of directors; more so, when the owners of small private companies know how to safeguard their commercial interests.

Worse, the monetary amounts prescribed in these sections were fixed more than 25 years ago, and they are way short of current market levels. But the Government has revised the penalty exactions — the monetary limits of which were also fixed 2-3 decades back — by ten times.

Focus areas

In this background, a change in company law should logically emphasise the following fundamental aspects:

Self-governance under strong supervision, rather than the Government interfering with micro-management of business;

Minimum regulation for family-owned, small private companies, particularly those companies that do not avail themselves of any bank or financial institution assistance;

Private and small companies which utilise the financial facility of banks or financial institutions indirectly deal with public money and, therefore, need that much regulation to support and protect the stakeholders’ investment;

Public companies that directly or indirectly engage public funds and listed companies to be regulated, complementing other laws that govern them.

For the purpose of regulation, the Companies Bill 2008 describes the structure of companies in the following categories: private company, public company, ‘one-person company’, listed company, and small company.

Lacking in implementation

While the division of different companies into these categories seems logical, there seem to be lags in implementation owing to the following reasons:

The control of the legislator has not been given up, but has been shifted to executives through ‘prescriptions’ of sorts.

Small companies’ prescriptions of amounts are left to executives through rules. This approach is understandable, as over a period the monetary ceiling limits are bound to increase with inflation.

If this is the approach, why does the Bill seek to fix an upper limit? Any amendment to the upper limit would call for amendment to the new law itself later, which is not easy, going by the experience in the existing Act.

The new and separate category, the one-person company (OPC), initially raises the interest of business that there is minimum regulation for such category, as business in India is predominantly proprietary, family and partnership. But such hopes are dashed as Clause 171 controls the contracts entered into by OPC.

The details of such contracts are to be entered in either the memorandum of the company or by a board resolution and filed with the Registrar with additional fee. Failure will attract both penalty and prosecution!

If a person desires to carry on business as a proprietor, there are no such controls, but the controls come in if he were to organise his business as an OPC under the Bill.

What is the rationale for such control, when the market can deal with OPCs in their best commercial judgment and self-regulation?

(R. Balasubramaniam is a practising company secretary and law graduate, and K. Ramesh is an advocate and a fellow of the ICAI. blfeedback@thehindu.co.in)