The Hindu Business Line : Is there need for a new company law?

The obsession with the size and age of the Companies Act, 1956, has overtaken any serious debate on why the company law has failed to be effective as a corporate governance tool and as a bulwark against corporate fraud.

THE J. J. Irani Committee has submitted its recommendations on company law reform. While many of its recommendations are wholesome, quite a few are already on the statute book waiting to be notified.

In the past few years, there have been increased deliberations, though not always informed and reflective, on reforming company law. The obsession with the size and age of the Companies Act, 1956, has overtaken any serious debate on why the company law has failed to be effective as a corporate governance tool and as a bulwark against corporate fraud. The issue is complex and should not treated simplistically.

More than the law, it is corrupt administration that has led to the current state of affairs. Any measure that does not adequately address the corruption menace will not be meaningful. The e-governance initiative for the administration of company law is welcome and should be implemented quickly.

But without attitudinal change among the administrators of the law, e-governance will not be able to cleanse the system. A thorough review of the administrative set-up and a public debate thereafter should yield some results.

As a concept, the National Company Law Tribunals as a substitute for High Courts for company law adjudication is good provided these tribunals are manned by those with calibre and stature. Any attempt to make these tribunals sanctuaries for retired bureaucrats and government officials without regard to merit would result in auctioning of orders to the detriment of all stakeholders. This pitfall should be avoided by all means.

Excessive delegated legislation is bad

The J. J. Irani Committee does not say definitively about the level of delegated legislation in the reformed company law. The Concept Paper brought out by the Ministry of Company Affairs has reduced the company law into a set of around 300 Rules in an attempt to shrink the law by half. This is unfortunate and may not pass judicial scrutiny.

The Supreme Court has, in quite a few cases, held that in the absence of a clear legislative policy in the substantive law, delegated legislation would be bad in law. This is an important aspect which policymakers have to take note of, lest the reforms may get mired in judicial controversy. Thus, the level of delegated legislation proposed in the Concept Paper is neither sustainable in law nor desirable.

Recommendations need a relook

While it is true that companies should be allowed to shift their registered office freely from one State to another, the doing away with the confirmation of the Company Law Board (CLB), as required at present, is not desirable given the peculiarities of the Indian corporate sector.

It is not entirely true that such a confirmation from the CLB takes a long time; not more than 3-4 months in most cases. Hence, the Committee's recommendation to do away with such confirmation is not entirely correct.

While the freedom to do business through as many subsidiary companies as possible should not be restricted, as pointed out by the Committee, the requirement to co-opt an independent director of the holding company on the board of such subsidiary company should continue, especially in the case of listed companies to provide healthy supervision of the operations of such subsidiary companies. Hence, the recommendation not to have an independent director of the holding company on the board of the subsidiary company is not correct.

The number of independent directorships a person can hold should also be set down in law and ideally it should be much lower than 10 directorships. The Committee, however, has not recommended this.

Composition of audit committee is quite important from a corporate governance perspective. Any dilution in the independence and competency of the audit committee would directly impinge on corporate governance standards. Hence, the Committee's recommendation that at least one member of the audit committee should have knowledge of financial management, audit or accounts is not quite appropriate in the Indian context.

The prescription in the revised Clause 49 of the Listing Agreement, as mandated by SEBI for listed companies, should be the law for listed companies as far as audit committees are concerned and any dilution in it would hamper corporate governance.

The Committee has rightly recommended that the presence of one independent director should be mandatory even for emergency board meetings. However, in the absence of such an independent director in the emergency board meeting, to get the decisions taken in the emergency board meeting ratified by an independent director may not always be practicable. Hence, it may be prescribed that such an independent director be present in person or through video conferencing or some other electronic mode.

The Committee's recommendation that the chairman of a meeting should have the power to overrule the demand for a poll under certain circumstances may go against the grain of corporate democracy. Instead, the threshold eligibility for demanding a poll could be fixed at one-tenth of the voting power or shares of paid-up value of not less than Rs 50 lakh, whichever is less.

The Committee has recommended that participation or non-participation by interested shareholders on a matter of business at general meetings should be left to companies to make appropriate provisions in the articles of association. The credibility of company law as a tool of corporate governance rests precariously on such provisions. Hence it is important that interested shareholders of listed companies are debarred from participating and voting on such matters at general meetings.

A provision in company law that facilitates giving of quasi loans to directors and funding their expenditure to be paid back later would lead to pernicious practices and the Committee's recommendation in this regard is not welcome.

The Committee has also recommended that Section 208, which allows payment of interest on share capital with Government approval, be deleted. Given the peculiarities of the corporate sector, there is wisdom in retaining the Section, with exemptions for infrastructure and other long-gestation projects as may be prescribed.

Today, mergers in the Indian context are usually completed in 4-6 months barring notable exceptions. Hence, change of law in this respect should be proceeded with caution. The Committee's suggestion that contractual mergers be permitted without the intervention of the court or tribunal is misplaced.

No need for a new legislation

With the notification of many of the provisions already brought in by the Companies (Second Amendment) Act, 2002 and with some of the suggested changes of the J. J. Irani Committee being implemented by way of amendments to the Companies Act, company law reform would, by and large, have been achieved. Re-codification of the company law at this time may be a long-drawn process without commensurate results.

It is meaningless to have modern company law without a credible administration. Therefore, administrative reform should be taken up in tandem with legal reform.

(The author is a Chennai-based tax consultant.)

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