The Hindu Business Line : Abdication in the name of delegation

IN its enthusiasm to trim the Companies Act — that is, from a massive 658 Sections to 289 — the Central Government is seeking to substantially increase its power to make rules and regulations. Matters of legal importance are left to the executive to decide. The Act is replete with phrases such as "as may be prescribed", "as prescribed" and "as per rules", so much so that anyone reading the bare Act will never get a grasp of company law. Such a situation is unacceptable and needs to be checked both by the legislature and the judiciary.

Some decisions which were hitherto left to the wisdom of company owners have been brought under the control regime. A few important areas that the executive has usurped are:

Section 5(5) provides that the format and contents of the Memorandum of Articles (MoA) and the Articles of Association (AoA) "shall be as prescribed". This has always been in the domain of corporate democracy. Table A of the Act was merely a model which may in part or full be adopted at the company's discretion. In the case of a foreign tie-up, the collaborator insists on certain covenants to be incorporated. This procedure has stood the test of time and there does not appear to be any justifiable reason to trammel on corporate democracy.

Section 2(45) requires, among other things, the possession of certain attributes "as may be prescribed by the Central Government from time-to-time" for a person to become an independent director. How is the Government competent to take a general decision on a matter that needs consideration on a case-to-case basis depending upon the intricacies, skills and knowledge of the product manufactured/marketed or scientific training imparted. The result is that the proposal is destined to stay dormant.

Alteration of MoA and AoA: The procedure for alteration of MoA is to be prescribed by the Central Government and any alteration even after shareholder approval by means of a special resolution "in the manner prescribed" shall be subject to the conditions "as may be prescribed" and shall have effect only upon a certificate of registration being granted by the Registrar of Companies (RoC). An unwarranted and unnecessary requirement which will cripple activities to a certain extent, particularly in the absence a time limit for the RoC to complete the exercise.

Chief accounts officer: Section 88 talks of a welcome move. Every public company with a paid-up capital of such amount "as may be prescribed" shall appoint a whole-time chief accounts officer with such qualifications "as may be prescribed". This rule-making power can render the rule nugatory if the Central Government so frames rules as to suit retired government employees or who may opt for VRS regardless of the basic qualification or domain knowledge.

The Act must prescribe the broad category of qualifications as in the case of auditors, company secretaries, cost accountants, and so on.

Need for safeguards

The technique of delegated legislation has definite advantages and has been resorted to nowadays more frequently and become generally acceptable. Yet, the dangers inherent in its indiscriminate use cannot be lost sight of. It is important to develop safeguards and remove feelings of insecurity and distrust created by an apprehension that the Government may misuse powers of delegated legislation to its advantage.

This is a genuine grievance if one looked back at how this rule-making power was misused, either favouring the incumbents in high posts or ensuring a berth for political and bureaucratic heavyweights.

Control can operate at two levels. First, at the point of delegation by the legislature and, second, at the point of exercise of delegated power by the administration.

Delegated legislation will serve its purpose only if suitable safeguards are provided. At present, Sections 279 and 280 delegate powers to alter schedules and make rules.

The most mischievous of provisions is sub-section (1)(b) of Section 280, which empowers the Central Government to make rules "generally to carry out the purposes of the Act," and this is taken advantage of blatantly. This is an apology for a safeguard; in actual operation the notification does not reveal the date on which it was placed before Parliament and the last date for Parliament intervention. The normal practice has been that such rules are laid during the end of the session so that they never see the light of the day. One does not know whether the Government follows a procedure of circulating this information to members of Parliament personally in order to draw their attention.

Nonetheless, two things have come to stay:

Modern governance and speedy justice demand that the delegated legislation has a vital role to play and is acceptable as innovative.

To prevent unethical practices and highhandedness it is necessary that such legislation be approved before being put into effect.

There are two ways in which this can be achieved:

i) The Law Commission can set up model guidelines prescribing the basic parameters and the extent to which such legislation can be resorted to and, at the same time, appoint an agency to monitor the operation and the periodicity of amendment so that undue hurry and lack of application of mind in drafting do not make the legislation a source of litigation.

ii) An oversight body can be appointed which will be held responsible and accountable for such legislation, which will accord its approval; this may be made mandatory before the rules are put into effect. The said body can also monitor the operational flaws and difficulties encountered by those responsible for complying with the regulatory provision. In the event of dispute, the said body can also arbitrate.

Since the Prime Minister, Dr Manmohan Singh, is very serious about bureaucratic reforms and transparency in operations, the issue can be taken up on a war footing.

(The author is a Pune-based company secretary.)