The Companies Bill gets a cosmetic makeover

Claims that the legislation will be trimmer and neater are illusory

The concept paper on the Companies Act, 1956 proposing a redrafted Companies Bill 2004 is praiseworthy in that the Bill has been drafted and circulated along with it.

The earlier practice was to circulate only the report, which was then debated. Thereafter, a Bill was circulated, which was also debated. The resultant delays were so lengthy that, typically, even the ruling party changed! (Ironically, the original Companies Bill 1993 was formulated by the present finance minister, P Chidambaram!)

The other problem with circulating a report and Bill separately was that the legal wording of the two documents often did not match. The present Bill has the advantage of response on policy as well as legal/drafting issues. We can, thus, hope for a quicker enactment.

Of course, as discussed later, several important provisions will be released separately in the form of rules and one will have to wait and see if there are significant changes that may delay or even derail the whole process.

The Companies Bill 2004 boasts of an outstanding feature and approach "" it proposes to reduce to less than half the size and sections of the existing Act. While this may appear to be a dream approach, the reality is going to be far from otherwise.

The fact is that many of the omitted provisions are to be provided in rules to be prescribed separately. The likely result is that all these rules taken together with the Act would exceed the existing Act in size and number.

The approach of providing many of the detailed provisions is likely to generate plenty of debate. The good aspect of this is that rules can be quickly amended without the long-drawn process of parliamentary amendments.

The negative side is that the rules may change repeatedly and, worse, selectively favouring some lobby or the other. If recent rules (for example, rules issued under Section 274(1)(g)), are any guide, the rules often tend to over-reach.

Finally, question will also arise in many cases whether such power of making law on substantial policy matters can be delegated to the Executive.

The fact that a large number of provisions require that their substantive and other requirements will be in the rules means that all these rules must be formulated and submitted for public debate with the Bill. This process may delay the enactment.

In fact, a detailed review of the Bill reveals that there is almost a compulsive obsession to provide for, in the rules, almost every conceivable detail in the section.

The procedure for share buybacks will be in the rules, as will the resolutions that should be filed with the Registrar, almost all the requirements for postal ballots (no wonder these requirements are reduced to just two paragraphs) and what should be included in the explanatory statement, and so on, ad nauseam.

The Bill proposes to make numerous major and minor alterations and a detailed review of these would surely be in the form of mammoth tomes that industry and professional associations will submit to the minister. Given here are some observations on some key amendments.

The Bill rightly places the responsibility of maintaining proper accounts on important people. However, unlike other provisions where details of people who are specified have to be registered with the Registrar of Companies, this requirement is absent in this provision that deals with the sensitive area of accounts.

The provisions empowering the Central government to order special audits is of serious concern. The reasons for ordering such audits are vague and all-encompassing "" the reasons include business not being managed as "with sound business principles or prudent commercial practices", or that management of the company is being conducted against public interest, and so on.

The scope of the audit is not laid down in the Bill and will be at the discretion of the Central government. All this leaves scope for targeted harassment.

What would be the result of such an audit? What can the government do even if there are adverse findings? It is no contravention of the law if, say, the business is not conducted as per, in the opinion of the auditor or the government, "sound business principles".

Will the government order that the business be conducted according to business principles determined by it? Does it have the authority to do so?

At best, the company can be punished only if there are findings of clear contravention of law such as price manipulation. But for these purposes authorities such as the Securities and Exchange Board of India (Sebi) have the widest power to take action.

The only power with the government is that it can, through a tribunal, remove managerial personnel responsible for such adverse findings. To conclude, this is a section that is purposeless, potentially capable of misuse and is best dropped.

The mandate of having at least 50 per cent of independent directors for companies with a turnover or capital above a specified amount will be rightly criticised.

A 100 per cent privately-owned company has no need for interference from so-called independent directors. If this is still put into force, it is likely that hand-picked puppets will be placed.

The Bill has also missed the opportunity to remove several obvious ambiguities. A simple example is the provision on minimum capital and acceptance of deposits by private companies. An amendment in 2000 introduced a provision under which companies were required to increase their capital to the minimum prescribed amount within two years.

However, the manner and wording of the amendment was confusing and it is unclear what consequences companies will face for either raising the capital belatedly or not raising it at all. Unfortunately, though the transition period has passed, the present provisions continue such wording.

The other example is of restricting private companies from accepting deposits under an amendment made in 2000. Instead of taking the obvious route of prohibiting such companies from accepting deposits, the Bill continues to require that the articles of association should contain such a restriction. It is also not clear what will happen to companies if still they have not modified the articles of association.

The penalty and punishment provisions have been recast for many contraventions. The maximum punishment for accepting deposits beyond the specified norms, interestingly, has been reduced from five to two years.

This is strange since accepting excess deposits and then defaulting would need no concession. Recollect that non-repayment itself is not severely punishable and the only area where control is exercised in the Act is acceptance of deposits beyond certain limits.

The wording relating to the punishment by way of imprisonment is unclear "" for example, for accepting excess deposits, the words used are "imprisonment for a period of two years". What it probably means is a maximum period of two years.

Another example of an area that needs attention is punishment for non-compliance of rules for postal ballot. For shareholder consent in vital issues, postal ballot provisions are prescribed, since they can really work since each shareholder has a full chance of actually voting. However, the maximum amount provided even under the new provision is just Rs 1 lakh and no imprisonment, even as an alternative.

The contraventions for inter-corporate loans and investments also face a substantially and almost ridiculously diluted punishment. The maximum punishment, irrespective of the amount involved, is a fine of Rs 1 lakh. Compare this with the existing provisions that not only provide for fine but also imprisonment up to two years.

To conclude, the exercise of recasting the Companies Act, 1956 and making it simpler and smaller is cosmetic. Taken together with matters prescribed in the rules, without which this Bill cannot be said to be complete, the final statute is likely to be far longer and more complex.

Delegating most of the substantive provisions and procedures to the Executive is questionable in terms of legislative competence "" more so if the recent history of rule- making is any indication.

Companies do have reason to complain against the severe punitive powers under the Act, but where serious matters such as use of public shareholders' monies and deposits and areas where safeguards against serious misuse have been provided for, the contravention of such provisions needs punitive powers, if only as a disincentive.

(The writer is a Mumbai-based chartered accountant)