The Hindu Business Line : A Goliath at the gym

THE Companies Act, 1956 can be considered as the mother of corporate laws in the country. Born on January 18, 1956, it is the principal legislation governing formation, operation and winding-up of companies.

It is symbolic of a banyan tree shredding its huge trunks of chapters and numerous provisions catering to various categories of companies.

The Act has been amended as many over 24 times. On every occasion it addressed the various issues arising out of the demands of the corporate sector, shareholders and various other stakeholders' interests, including that of the creditors. The major reforms in the Act started in 1997 when a Bill was introduced. All those changes, which were recommended by the Expert Group, were introduced in subsequent amendment Acts. The steps that were undertaken to reform the law addressed mainly the three Cs — compactness, compatibility and compliance.

In brief, a good system of company law should: provide a simple and cheap method of incorporation, operation and winding-up of companies; give the company flexibility to meet the needs of diversified expectations of shareholders and stakeholders; clearly identify the duties and powers of directors within the corporate structure; offer better accessibility to varied interests groups by identifying rights and duties within the company; ensure that the law, rules and regulations prevent abuse of power by the board; provide for better and quick system for redressal of investor grievances; ensure that the law is synchronised and harmonised with other related laws; specify regulator jurisdiction and responsibility; and provide for better, transparent and timely disclosures of financial information to the shareholders.

The Ministry of Company Affairs released a Concept Paper on Draft Company Law, which is a re-characterisation in the form of downsizing its 781 sections and 15 schedules.

Called the Draft Companies Bill, 2004, the model law has proposed 289 sections and fewer schedules.

The law should be rule-based, leaving principles in substantive part. This will make it easier to amend the law without going through the process of approaching Parliament.

The Draft Company Law was later entrusted to the Expert Committee on Company Law headed by Dr J. J. Irani, which submitted its final report to the Government on May 31, 2005. It is expected that a new Bill on the law will be introduced in Parliament.

The exercise

The main features of the proposed compact company law, include the following:

For law — regulation and compliance: Company law in a single, comprehensive and centrally administered framework; principles of law in substantive portion and others to be rule based; enable harmonious operation of all regulatory agencies; enable development of institutional structures; introduction of e-governance for filing returns; liability for compliance of law on the management; penalties to be monetary/ non-monetary and commensurate with offences

For corporate: Freedom of operation for small and private companies; concept of one person company (OPC); no restrictions on number of subsidiaries; dispensation for producer and public financial institutions; legal process for tracking vanishing companies and disgorgement of funds; limited liability partnership through separate enactment; dispensation of certificate for commencement of business; make procedural aspects for shifting of registered office from one State to another simple, faster and easier

For corporate management: Appropriate frame of governance for the board; no limit on the number of directorship; independent directors only one-third; additional disqualifications for director; mandating of certain committees; meetings through tele-conferencing; easier access to capital for companies.

For shareholders: Minority and interest to be defined; independent valuation for mergers; shareholders' responsibility for monitoring end use of funds; approach to consumer courts and capital market ombudsman; right to claim dividends even after seven years; compensation only in the case of established fraud.

For transparency and disclosures: Consolidation of accounts and cash flow statements mandatory; financial statements to be signed by MD/CEO/CFO/CS; rotation of auditors not mandatory; and special audit to be discontinued.

For exit of corporate: Deemed approval concept for mergers and amalgamations;

introduction of electronic registry for stamp duty payment; liquidity as the test for liquidation; concept of insolvency practitioners; commercial approach for insolvency;

insolvency fund instead of rehabilitation cess; facilitating cross border insolvency

Further steps

Harmonisation and centralisation: Any law is good provided it speaks the goodness not only for itself but also for others. In other words, law should not be such that it neither overrides the other related Acts nor allowed to be over-ridden by other statutes. Most of the Indian statutes in corporate laws suffer from this lacuna.

The Companies Act, 1956, at present big and bountiful, is overridden by so many other pieces of legislation and this need to be addressed.

One possible solution is that the concepts of harmonisation of corporate laws be given top priority by the legislatures.

Besides, a corporate is governed by at least 3-4 statutes and under jurisdiction of minimum two regulators. The laws are different and, hence, compliance becomes not only difficult but also self-defeating.

Internationalisation: It is imperative that law takes cognisance of international developments on a constant basis.

Simplification: The content of the law should primarily concentrate on: easy formation of, and exit for, companies; management and governance based on fuller transparency and disclosures; safeguard investor interests; compliance as a matter of cost efficiency; and easy for regulatory peer review.

The process for compacting is on and one hopes that it will usher in a better environment for the corporate sector, investors and regulators.

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