Idea is not to make the regulations draconian: Sachin Pilot

Interview with Corporate Affairs Minister

With the Companies Act, 2013, entering the rule-framing stage, Corporate Affairs Minister Sachin Pilot is busy building consensus among various stake holders - companies, auditors, lawyers, bureaucrats, regulators and investors. In an interaction with Sushmi Dey and Sudipto Dey, the 36-year-old minister tries to allay the fear in certain quarters of India Inc that the devil in the Bill might be in the details. Edited excerpts:

Now that the Bill has been cleared by the Rajya Sabha and awaiting Presidential approval, is how soon can we expect the rules to be framed?

We have a rule-making committee within the ministry. This committee has members from various chambers of commerce, law fraternity, auditors, and investing community. I have said this on the floor of the House that when rules are being drafted and framed, it will be the endeavour of the ministry and I will take personal initiative to ensure that rules are not framed in an opaque manner in a closed room. It will be done after full discussion and whatever is advised by the members of the committee. Once the rules are drafted, they will be put on the internet to solicit public opinion. Based on that, we will ensure that rules are practical, palatable, enforceable and acceptable to as many people as possible. The Bill has been in the making for more than 10 years. I am trying to do the rule-making as soon as possible but keeping in mind that it needs a lot of thought, a lot of inputs and technical aspects are involved. Some people have said there are too many "to be prescribed" clauses. To address that aspect, we are making sure it is not a bureaucratic exercise done by ministry and officers. I don't want to rush through this but at the same time, not delay it longer than it needs to be.

 
As you pointed out, many seem to be spooked by the high degree of "to be prescribed" clauses in the Bill. There are 470 such clauses were rules are to be prescribed...

Substantial rule making is done in the articles and clauses. And, that will be done by the ministry after taking everyone's ideas on board. I don't think there is any need to be overly concerned about that. We are working on all the rules simultaneously. But some important ones like CSR (corporate social responsibility) rules will be taken up first.

In light of the spot exchange or the chit fund scams, are there enough safeguards for small investors and minority shareholders in the Bill?

Minority shareholders and the investing community need adequate protection. However, the idea is not to make regulations draconian or overly cumbersome for boards and management of companies to comply with. At the same time, we want people to deal with their companies in a very transparent fashion. We have allowed board meetings to be done through video conferencing, electronic voting has been allowed for the first time, as are class-action suits. We are also doing away with the Company Law Board and setting up the National Company Law Tribunal to mitigate time to resolve disputes, with special courts for dispute resolution. There is provision - though not mandatory - for boards to have one director to represent minority shareholders. Independent directors, too, would be able to look out for the interests of minority shareholders. So, more transparency, more disclosure, self-regulation, self-compliance - all of these will help create an environment for regulations to be complied with, for investments to take place.

As far as investors are concerned, technology will give them a big leverage for them to seek protection of their interests. We have the Investor Education Protection Fund, which will be deployed more significantly in the coming months and years. We are educating investors and strengthening the state machinery so that we are able to detect these before they become scandals and scams.

Sebi (Securities and Exchange Board of India) gets 70-80 alerts a day where they believe something can go wrong. There are parameters - which we now have in some of our RoCs (Registrar of Companies) offices - such as a dramatic shift in shareholding patterns, directors being changed quickly, profit and loss varying too much, too many bank transactions - all these will then throw up some red flags which will allow the ministry to check these out. So data mining will be done continuously to detect possible non-compliance or fraud. Agencies working together will help reduce instances of corporate frauds. All regulators and agencies must not work in silos and must share information at least every two-three months.

Are you framing some guidelines to make it easier for all these agencies to work together?

Sebi has been given some additional powers to act against collective investment scheme (CIS) companies. We are trying to reduce the regulatory gaps that exist. For the common investor, it does not matter who the regulator is. We are working more closely with state governments. The inter-ministerial group has been constituted after the Sharda incident in West Bengal. The finance ministry, corporate affairs ministry, and our agencies must work together. The fiefdom issues are not something I am very worried about. We must define our roles, whether it is NBFCs (non-banking finance companies) or chit fund companies that states have to regulate. We also have jurisdiction problems as some of these companies work across states.

The issue of two per cent CSR spend has generated a lot of heat among corporates. Have you given thought to introducing Business Regulatory Impact Assessment, which is more holistic in nature?

First of all, when we frame the rules for CSR, my personal opinion is: things like religious donations should not be part of CSR. Having responsible corporate behaviour - not just corporate social responsibility - is about if you earn money through avenues that is not sustainable, that is destroying the environment, or not giving people the right remuneration, or not taking communities along. Just writing a 2 per cent cheque does not absolve you if you do business that is not in a sustainable fashion.

The point many are making is that the 2 per cent CSR spend can act as escape route for the unscrupulous players…
Why should you be so cynical at the beginning? I am sure there are people who will find ways to get out of this. I cannot not make a law assuming that it will be misused. We make this law with the best intentions. Let's be positive about it, let's give the corporate world a chance.

While there could be a few bad apples, why should we assume that the entire corporate world wants to bypass this law and does not want to contribute? The fact is they want to contribute. By spending money on CSR, you are creating a social environment, you are creating ecology around your workplace that will help you get better workforce. It will help reduce the trust deficit that is sometime there between large companies and the communities that live around the area. We can't have a fault line developing between large companies and the areas they work in not getting satisfied.

At no point do I want to encourage inspector raj to say this is right or that is wrong. Let the collective consciousness of the company and its board members decide that. It is their money - it is not a levy or a tax that I collect - let them invest it the way they think it is important.

Will the new Companies Bill make it easy to do business in India?

In some sense, as dispute resolution will become much easier and faster. It will not go on for years. Besides, there will be more jurisprudence and transparency. The Bill will encourage self disclosure and self reporting. The ease of doing business will certainly help create a better environment. It will give more confidence to the investor community, both in India and abroad. Our investment climate will get better because our rules and compliance will be in line with the best global practices. Indian companies are now going abroad and foreign companies are investing here; so there must be compatibility in the rules, regulations, working ethos, and good corporate governance.

The Bill attempts to create tribunals such as the National Financial Reporting Authority (NFRA). How is the role of institutes such as Institute of Chartered Accountants of India (ICAI) going to evolve going forward?

NFRA is a quasi-judicial body, whereas ICAI has a separate role to play. The institute was created by an Act of Parliament, so there is no question of over lapping, taking away powers. ICAI-like bodies will continue to do what they were intended to do. NFRA will be a body for all financial reporting. If there is non-compliance, it will be authorised to take action against people found guilty.

NFRA is a much wider entity being created so that reporting becomes more transparent and if any action needs to be taken, it will be swift so that there is confidence amongst the investors also. The Bill is very clear on what NFRA will look like, but the rules are yet to be framed. We will take everyone's suggestions before we actually do that.