Shouldn’t have parted company with old laws

For old-timers, there is something sad about the way we follow the US, in particular, to either marginalise or jettison tested principles of company law in India. In 2000, we ushered in a regime of buy-back of shares that went against one of the fundamental tenets of company law and jurisprudence — a shareholder would be paid last on winding up, and while the company is a going concern he cannot exit except through transfer of shares in the manner permitted, usually in the bourses in the case of listed companies. This is now turned on its head when a company goes for buy-back.

Farcical situation

In what appears to be a farcical protection to creditors, a company buying back must transfer at least the face value of the shares purchased to buy back reserve. Mercifully, we did not go the whole hog and embrace the American model that permits buy-back for treasury operations, read selling in the market for making profits in insider trading, which constitutes the worst form of corporate immorality.

Our lawmakers held themselves back and followed the British model that mandates cancellation of shares bought back. The Securities and Exchange Board of India (SEBI) has done well recently to mandate buy-back democratically from all shareholders proportionately, thus removing the option to buy from the market.

All the same, buy-back still has the effect of marginalising the interests of the creditors especially the unsecured.

Then we embraced the LLP (limited liability partnership) model, once again to keep up with the Joneses. Partnership exposes the partners to unlimited liability whereas a private limited company restricts a shareholder’s liability to the extent of his shareholding.

This distinction was clear-cut but the Limited Liability Partnership Act, 2008, queered the pitch by bringing into picture something that has trappings of both —flexibility of partnership as far as meetings and other rigours are concerned, coupled with limited liability to confer the best of both worlds. One wonders why the extant private limited companies have not made a beeline for conversion into LLPs.

The Companies Act, 2012, goes a step further and institutionalises the concept of one person company (OPC) which, to the purists, is an oxymoron given the fact that the word ‘company’ means at least two persons.

Split personality

This too has been done to keep up with the Joneses. OPC embodies a psychiatrist’s vision of a split personality. OPC means a person within a person: the physical person and the commercial person. The latter warns creditors that he is liable to pay no more than what he has subscribed to the capital of the OPC. His personal assets cannot be attached in case of insolvency.

While this can be hailed as a notice to outsiders not to overreach themselves in dealings with such individuals, the Chinese wall between the physical person and the commercial person could bamboozle the outside world.

The perception of proxies has undergone a change in the new Companies Act, 2012.

Earlier, a shareholder could appoint a proxy who could represent any number of shareholders, but the new law says a proxy cannot represent more than 50 members.

One wonders why. After all, he cannot speak in his capacity as a proxy. But the restriction can be overcome by buying at least one share of a company.

Further, he cannot vote, except in a poll and not in a show of hands. What is wrong in allowing a proxy who represents, say, thousands of members?

Is the fear of meetings being hijacked by professional proxies at the back of this restriction?

Even if the fear is not unfounded, this restriction can be easily overcome by resorting to the services of multiple proxies with each representing not more than 50 members.

Streamlined provisions

Provisions relating to proxy directors, technically known as alternate directors, have been streamlined. Hitherto, a proxy director could be appointed even for an Indian resident so long as he was away for at least three months from the state where the board meetings were normally held.

Now, such a proxy can be appointed only if the original director is away from India for not less than three months. This is as it should be.

Further, no proxy director can stand in for more than one original director.

This, too, is a salutary change. As it is, a proxy director can represent and stand in for, say, five directors, giving rise to the ridiculous situation of being counted five times when he votes.

But the moot question is whether a proxy director should be countenanced at all.

The office of directorship is too serious to be delegated to proxies.

If a person, in view of his foreign residence, cannot attend board meetings, it is better he does not accept the office rather than belittle it with nominating a proxy.

To be sure, technically, the proxy director is appointed by the Board but for all practical purposes he is the nominee of the foreign director.

(The author is a Delhi-based chartered accountant)

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