Saturday, August 30, 2008

Reforming Indian Company Law

After a prolonged wait, far-reaching reforms are finally underway in relation to the Companies Act, 1956. The Union Cabinet yesterday gave its approval to the Companies Bill, 2008 which is set to introduce a comprehensive revision of the Companies Act. Though the Companies Act (enacted in 1956) essentially tracked the then existing English company law, and although the Act has undergone a great number of amendments over the years, it has failed to keep up with developments in the corporate sector globally. For instance, the United Kingdom itself has amended its company law in the meanwhile, including in 1985 (with a new company law) and more recently with the Companies Act, 2006 (which is being brought into effect in stages). Other jurisdictions in the Commonwealth which similarly borrowed from English company law, such as Australia, New Zealand, South Africa and Singapore have also constantly amended their laws to meet with dynamic business situations. On the other hand, Indian company law still carries several archaic concepts which have long been shunned by other jurisdictions. Given this background, the latest initiative of the Government in simplifying and modernising Indian company law is a welcome move. But, as is always the case, the devil lies in the detail.

A Press Release of the Government encapsulates some of the salient features of the Bill. These are:

- The Bill provides basic principles for all aspects of internal governance of corporate entities and a framework for their regulation;

- Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions by shareholder control;

- Easy transition of companies operating under the Companies Act, 1956, to the new framework as also from one type of company to another;

- Introduction of a one-person company (OPC);

- E-governance initiatives; also, ability to satisfy meeting requirements (of board of directors, etc.) through electronic mode (such as video-conferencing);

- Facilitation of joint ventures; increase in maximum number of partners in partnerships from 20 to 100;

- Companies to have a minimum of 33% of the board strength consisting of independent directors;

- Separate framework for determination of fair valuations in companies for various purposes;

- Facilitation of shareholder actions in case of fraudulent conduct of companies, such as through class actions;

- Revised insolvency framework that covers rehabilitation and winding-up of companies;

- Comprehensive dispute resolution framework, through the establishment of the National Company Law Tribunal;

As a copy of the Bill does not appear to be available yet in the public domain, it is perhaps premature to attempt a detailed analysis of the provisions. At a general level however, some of the efforts are laudatory in terms of simplifying company law. These including the setting up of one-person companies, reduction in governmental control in management and operation of companies, and e-governance initiatives. However, there are several areas where reforms seem to be inadequate, and there are a number of them at that. Just to explore a few –

(i) obliteration of the concept of par value of shares, which has largely lost its significance in modern company law; similarly, the concept of a minimum authorised share capital. There is no apparent effort to address these matters in the Bill;

(ii) abolition of the doctrine of ultra vires. Indian company law still requires an “objects clause” to be contained in the memorandum of association. It is well-known that drafters of memoranda follow the “kitchen-sink” approach in drafting objects, making them look inelegant at the very least. Considering that other economies are moving away from the need for companies to have objects clause at all (as they have lost their relevance in modern company), efforts in this direction would help to simplify company law;

(iii) changes to the doctrine of ‘financial assistance’ contained in Section 77 of the Companies Act, 1956 in the light of the emergence of leveraged acquisition as a popular form of M&A transaction.

This list could go on. Since the Companies Act is currently undergoing a comprehensive revision, it would help for all these other aspects to be considered in detail so that they are incorporated in an appropriate manner precluding the need for further changes on an ongoing basis.

Further, it appears that in some cases the changes have been retrograde. For instance, the summary of the provisions indicate that the Bill proposes to do away with the concept of shares with differential voting rights. This sends confusing signals to the market. When the concept was introduced only recently in the first place (in 2001) and when companies are yet to implement this facility largely due to the excessive restrictions placed in this behalf, it may not augur well to then withdraw this facility altogether rather than to streamline it.

Lastly, the Bill does not seem to fully address a quagmire that company law and regulation often finds itself in, and that is the issue of multiplicity of regulation and multiplicity of regulators. The Department of Company Affairs (DCA), SEBI and RBI would continue to exercise regulatory powers and influence over different types of companies. For instance, while the DCA is expected to regulate all companies, SEBI’s powers extend to securities regulation in respect of listed companies and RBI’s in respect of banking companies. It is necessary for the legislation to clearly demarcate the powers of these authorities so that there are no loopholes left in regulation and enforcement of the law.

These are only some initial thoughts, and we can expect a greater discussion on the Bill at various fora once the detailed provisions become available.

(Press Reports are available in The Economic Times and The Indian Express)

1 comment:

ashish said...

I think one other provision which require a proper framework is the buy-back of securities. Under Companies Act, buy-back can be opted in two ways, first is under S. 77A and second is under S. 391 making an scheme of arrangement. The difference between these two provisions is, in the first SEBI has got the supervision powers whereas in the later provides a wide platform under which the companies can frame its scheme to any extent. Thus operation of these two provisions not only creates ambiguity for the companies but even sometime may result in any substantial harm to the shareholders. So what I think is the provision should be like this:
1. All buy-back schemes should be brought under the umbrella of SEBI 2. The upper limit with regard to the quantity of buy-back should be abolished and the decision making power should be completely left with the corporate wisdom.