A dip in the Holy Ganges, or the fabled Gangasnan, is one of the most enduring beliefs of Hinduism. People take all kinds of troubles to get to the banks of the sacred river before they die as it is believed that a Gangasnan washes one of his sins and cleanses the soul.
If one were to look for a similar concept for the corporate world, the provision to execute a court-approved scheme of arrangement under the companies law comes closest. Sections 391-394 of the Companies Act, 1956, deals with the various forms of schemes of arrangement and the way these can be done. These schemes can be for restructuring of debt obligations, merger of companies or demerger.
Though the provisions do not intend such a utility, corporate India has reinvented these sections as its equivalent of a Gangasnan (I heard this first from a top corporate legal eagle). Since the schemes of arrangement are eventually approved by the high court, companies have over the years used such schemes to bundle in all their sins and emerge clean.
Top corporate groups in the country run hundreds of companies and these are often tied to each other through cross holdings, debt transactions and other agreements. These companies often enter into schemes of arrangements. While some may be genuine, the tax department has had suspicion these were done for hiding undisclosed income. Since there were no express provisions, and firms do multiple Gangasnans, the money trail eventually gets washed in numerous cases and hearings.
Another area, where companies have used Gangasnan to good use is in front of sectoral regulators. There have been several instances in the recent past where regulated entities have entered into a scheme of arrangement and squeeze in a particular transaction as a clause in the scheme and get court approval. This court stamp is then used to argue before the regulator it was done with the court nod; it has even been alleged the regulator was victimising or being anti-business.
The schemes were also used by listed firms to pass off promoter-friendly, anti-minority shareholder moves such as related-party transactions and restructuring plans.
The ministry of corporate affairs (MCA) had published a circular last month strengthening the procedural requirements. It said the schemes needed to be cleared by the income-tax (I-T) department and also the sectoral regulators such as Reserve Bank of India and Securities and Exchange Board of India.
The circular puts onus on the regional director (RD) under the ministry to write to the I-T department and the regulators and solicit their responses. More, it has taken away powers of the RD to give an independent opinion on the issues raised by the I-T department, regulators, etc. Henceforth, the RD is required to report the matter to the ministry, which will then check with the ministry concerned before giving an opinion. This, in a way, plugs the possibility of RD-company 'friendship' coming in the way of an impartial assessment of an objection raised.
The ministry has effectively put in effect the provisions of the Companies Act, 2013, in this regard, yet to be notified. The provisions might slow the deal process to some extent. Genuine ones would go through anyway. And, if you stay away from the sins, why would you need a Gangasnan?
