Mohan R. Lavi on how the draft company rules could have been more thorough

Mohan R. Lavi

G. K. Chesterton remarked: "When you break the big laws, you do not get liberty or anarchy. You get the small laws". The sheer size of the Companies Act coupled with the apparent violations prompted the Government to undertake the task of shrinking the Companies Act to a `one-size-fits-all' size. With the draft rules also having been announced, a look at the Act/Rules gives one the feeling that the trimming exercise could have been handled better.

Names and relatives

Spouses were never considered as relatives in the previous version of the Companies Act. The new draft corrects this in style not only is spouse a relative but the spouse's parents and brother and sister also come under the definition of relative.

Grandparents do not find a place in the definition of this all-important term. One could ask "What's in a name?" after looking at the suggested provisions regarding name approval. The guidelines for name approval contain not less than 32 clauses.

Given the fact that there are so many clauses, the expectation on the Registrar of Companies (RoC) to grant the name approval within three days is welcome. A clause that surprises is the one that mandates a minimum authorised capital if one prefers key words such as `corporation', `international', and so on, in the name of the company.

The immediate next rule surprises even further when it reduces the authorised capital limit if the proposed names are used in brackets.

The guidelines on change of name are also long-winded but one doubts the possibility of going for a name change considering the detailed procedure followed for getting the name approved.

SEBI's role

The Securities and Exchange Board of India appears to have got a pretty good handle on the companies operating on the bourses. The provisions in the Companies Act, 1956 regarding issue of prospectus could have been avoided altogether since SEBI Guidelines appear more relevant. However, one sees more than 15 clauses in the Rules where probably a couple could have sufficed.

The printing costs of companies are bound to increase since every company is to print its name, corporate identity number and e-mail address in all bills of exchange, hundis, promissory notes, endorsements, cheques and orders for money or goods.

While information is needed on the company, insisting on e-mail IDs on cheques seems a dream.

Independent directors are the flavour of the season and are finding it easier to get an employment contract than a software engineer. An appreciable effort has been made to define the term `independent directors' and prescribe their qualifications.

Independent directors are non-executive directors of a company who, apart from receiving director's remuneration, do not have any material pecuniary relationship or transactions of Rs 5,000 or more with the company, its promoters, managing director, whole-time director, other directors, manager or holding company and subsidiaries. An independent director has to be a graduate from a recognised university/institute, have more than five years of post-qualification experience in the related field and is not prevented from being a director of the company.

Road ahead

There could have been simplification, such as removing the separate chapter on producer companies and inserting special clauses related to them in the relevant section if needed annual general meeting, for instance. In case there are special provisions in addition to the normal ones, they could have always been inserted as a special proviso. The draft rules announced are not complete. Though a good start, a lot more can be done and needs to be done.

(The author is a Hyderabad-based chartered accountant.)

(This article was published in the Business Line print edition dated March 31, 2005)
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