Pruning of law is a good step, says corporate India

India Inc has lauded the drastic pruning of the Companies Act, proposed in the concept paper released by Union Minister of Company Affairs Prem Chand Gupta, here yesterday.

The industry captains felt that with 658 provisions, the Companies Act had become unmanageable, with a large number of the provisions having outlived their utility. The concept paper has proposed to cut the number of these provisions by more than half to 289.

"The companies have been asking for reduction in the number of sections for a very long time and the ministry has now paid attention to this and we hope these proposals will be incorporated. The prohibitions on mutli-layered subsidiary could have far-reaching implications and the industry will read the fine print before making any suggestion. Besides, the Act should have separate provisions for small and medium entities. The Confederation of Indian Industries is studying the concept paper and will come up with a detailed analysis next week," N Srinivasan, director-general, CII, said.

When asked to give examples of Companies Act provisions that need to be chopped, these businessmen made specific mention of Section 6, regarding the presentation of financial statements, Section 14, which prescribes the minimum rates of depreciation and Section 212, which requires companies to attach the annual accounts of all their subsidiaries to their own annual accounts.

"What is the relevance of this provision when you have consolidated accounts?," said Vishesh Chandok of Grant Thornton India, adding, "An FMCG company can have up to 50 subsidiaries. It made sense to attach the accounts of all subsidiaries when there was no consolidation of accounts. Not any longer."

However, there were some reservations when it came to the number of independent directors on the board. The concept paper has proposed that the board of any company should have at least 50 per cent independent directors.

"Boards have changed substantially in the last few years and promoter families no longer dominate. But blocking 50 per cent seats for independent directors could cause the axe to fall on executive directors as you cannot remove the nominee directors," the promoter-director of a leading cement company said.

"In a situation where the whole-time director is not included in the definition of an independent director, having half strength of independent directors, will amount to immense power being given to those who do not have a stake in the company," KN Memani, former chairman of Ernst & Young India, said.

The business community has also taken note of the company affairs minister calling the concept of an independent director "faulty." He had argued that in order to take an informed decision, directors need to be stakeholders in a company.

"The intent to update the Act in line with the current business scenario and make it more investor-friendly is a good move. But there is still a lot of confusion over what the Companies Act says and what SEBI guidelines state. We need to have one simple unified law to govern companies," said Subodh Bhargava, adviser to the Eicher Group.