It is worth reiterating that Indias company law needs rewriting. Any attempt at simplification and going back to first principles invariably creates the danger of future misdemeanor in the absence of specific prohibitions. So a simple and manageable statute may, in time, get complicated with specific sanctions in response to situations. Although this may appear to be like going round in circles, the exercise is worthwhile if only to re-grasp the fundamentals under current imperatives and re-evaluate every special provision or sanction before introducing it. Having said that, it must be emphasised that the analysis of the proposed legislation in this paper has been an eye-opener. In trying to create an atmosphere in which companies can grow vigorously, a statute has been devised having mostly the comfort of the corporate sector in mind, to the virtual exclusion of the interests of the other stakeholders who enable a company to function.
The most disturbing aspects of the proposed law seem to centre on some of its most ambitious innovations. First is the notion of the group resource company, which could become a device to herald the return of a variant of the managing agency system. The affairs of the new entity will be non-transparent and the shareholders of the employer-companies will have no idea of what the resource company is up to, although some of the formers profits can easily get siphoned off into the latter.
What is particularly disappointing is that the chance to promote greater shareholder protection has apparently been wasted. Neither the board nor the non-executive director on it will become more powerful vis-a-vis the management so as to act as a watchdog for shareholder value. Most disappointingly, the provision of audit committees of boards has not been made mandatory. The idea of the postal ballot has been discarded and greater emphasis has been placed on the annual general meeting to uphold shareholder democracy when the limitations of such meetings is well known. The bill will seek to introduce non-voting shares but no limit to that has been imposed. The interests of one group of shareholders can be played off against another. It is logical enough to assume that the arbiters of the destiny of non-voting shareholders will be the voting shareholders but the former, attracted by the lure of high dividend, may find that the investment was not worthwhile till it is too late.
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Another point that needs looking into is the provisions for buyback of shares, on which no limit has been placed. It seems that share buy-back and re-issue can go on intermittently in a confusing manner. Particularly disturbing is the absence of the compulsion to create a buy-back reserve account as an asset which creditors can look to for their comfort. In the US, own shares cannot be shown as assets and have to be reduced from capital. The draft bill makes no such provision.
It can be argued that a company which is not good to its shareholders cannot have a bright future and so cannot have very many shareholders. This is already a reality as can be seen from the absence of new issues, implying a lack of confidence in issuers among investors. But the law should do more. It should promote good corporate governance and prevent the wrong kind of management from accessing public money. Most importantly, there should be checks against doubtful corporate practices which come into play long before a company actually goes down.