An amendment in halves

The chief merit of the concept paper on the new Companies Act is the decision to have a shorter, more streamlined version of the Act.

The new Companies Bill will contain 289 sections instead of the 781 sections under the present Act. As the concept paper points out, the Companies Act has been amended 24 times since its inception, and it's time for a recodification.

Apart from pruning obsolete and redundant sections, the paper also aims to simplify some of the existing provisions, while allowing a greater degree of freedom to company managements. One big improvement will be in the rule-making provisions, whereby many changes of a routine nature can be effected through changes in rules rather legislation.

This will be a major administrative convenience, allowing more flexibility and enabling the ministry of company affairs to function more effectively.

The ministry has been responsive to some of the criticism against the Companies (Amendment) Bill, 2003, and has decided, for instance, to drop provisions such as routing investments through one subsidiary, reservation for women directors on company boards, imposing a retirement age of 75 for directors, and prescribing qualifications for independent directors.

It will be unfortunate, however, if these provisions are reintroduced through the back door, through changes in rules rather than changes in the Act.

The principle underlying the changes should be a simple one""allow corporates as much freedom as possible to run their businesses, while at the same time ensuring that they play fair. The best way to achieve that objective is to keep the rules few and simple, and crack down hard on big violations.

The decision to revisit the penalties on erring corporates, therefore, is highly welcome. Currently, the quantum of some of the fines that companies have to pay is laughable and there's hardly any doubt that they need to be increased substantially to make them effective deterrents.

However, some provisions continue to smack of undue tinkering. For example, the ban on multi-layered subsidiaries, proposed in the Companies (Amendment) Bill, 2003, is being retained. If the objective is to stop companies from diverting money through their subsidiaries, that is unlikely to be met.

These transactions take place usually through associate companies as advances to subsidiaries have to be disclosed in the balance-sheet. It's also unclear whether merely insisting on passport and permanent account numbers of directors will prevent companies from "vanishing." Dummy companies can be set up without much difficulty.

It is also doubtful whether there's a need for having independent directors on unlisted companies' boards. However, the decision to offer the concept paper for debate needs to be welcomed.

Getting comprehensive legislation of this kind passed is difficult, as is evident from the two earlier failed attempts in 1993 and 1997. The discussions should help build a consensus for change.