Hailed by the Press as the high point of the year on the Indian corporate scene, the government’s clearance of the Companies Bill 2008, to be introduced in Parliament in the coming session, has a sense of self-congratulation, notwithstanding that the changes were due several years ago, given that the existing law is virtually dysfunctional
There have been several piecemeal efforts to amend the Act, without achieving the overall objective. A comprehensive effort was made in the Companies Amendment Bill 2003, based on the Naresh Chandra Committee recommendations. The amendment was criticised because of careless drafting and the inclusion of sensitive items such as mandatory board composition requirements was vehemently opposed; eventually the Bill lapsed. The newly-elected government in one of its first and most laudable initiatives created a model concept paper, a new Company Law, which was posted on the Ministry of Corporate Affairs (MCA) web-site, inviting suggestions from experts and stakeholders. The purpose was to provide a consensual law, consistent with changing times, delink procedural aspects from substantive laws and to consolidate, regroup and rationalise subject-related provisions under specific heads. The result was a precise compilation with 289 sections in place of existing 781.
As a follow-up, in 2005, the JJ Irani Committee was constituted for expert evaluation of the proposed revisions. The committee’s report invited mixed reviews, and was criticised as being loaded in favour of the promoter lobby, who welcomed the reduction of independent directors to one-third of the board as against half thereof, according to Clause 49 of the Listing Agreement. The Committee also recommended the creation of the limited liability partnerships (LLP) and one person companies (OPC) as alternate structures to the tax-ineffective partnerships and proprietorships.
The only official communication has been the press release by the government, which describes the amendments in general terms, such as harmonisation of the Company law framework with the imperative of specialised sectoral regulations. Should this be interpreted to mean that the Companies Act will be sector-specific for the purpose of corporate governance? Is there to be reconciliation with the policy guidelines for this purpose? Some measures are old wine in new bottles, except the bottling never took place. A single window forum for approval of mergers and acquisitions, insolvency and other matters under the Companies Act with the repeal of SICA was envisaged in the 2002 amendments with the creation of the National Company Tribunal. The changes were never given effect due to vested interests. Then there are references to compliance processes such as extension of the functions of MCA-21 and Director Identification Number (DIN) — it’s not clear whether the purpose is re-stating interim achievements, or providing for some upgrade of on-line facilities. The provisions for OPC as well as the removal of the restrictions on number of members in partnerships, increasing the maximum number of one hundred runs contrary to the claim of sectoral harmonisation with a single rule of thumb being applied to organisation structures in all sectors and services. Any amendment to Section 11 of the Companies Act, has to be concurrent and consistent with the LLP act provisions, and passing one bill and not the other, would involve duplication and contradictions.
While the press release is silent, the media are divided in their reports whether independent members will constitute one-third or half of a company’s board. There are also reports that the new Act will treat insider trading and mis-statements in prospectus as criminal and non-compoundable offences. One wonders how this is warranted as insider trading is already covered under special regulations, while Section 55 A of the Companies Act provides for issues by listed company to be governed by Sebi. Unlisted public companies issue Prospectus rarely, for limited purposes such as preferential allotments and buy-back of shares.
Perhaps the MCA can officially clarify these issues in a Press Release.
Kumkum Sen is a Partner in Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com