Important
amendments proposed under the Companies ( Amendment) Bill.
Curtailment of board
of directors' power
To safeguard the
investors, the Bill seeks to curb the powers of the board of
directors through amendments to the Act. Section 292(d) of the Act,
which confers on the board the power to invest the company's funds,
has been qualified to state that such investment shall not exceed 20
per cent
of the paid-up capital and free reserves in a financial year. The
amended clause further provides that the resolution to invest the
company's funds should be passed with the consent of all the
directors present at the meeting.
An amendment to Section
293 provides that the board of a public company, or its subsidiary
which was previously empowered to sell, lease or dispose the
company's undertaking up to any extent with the shareholders' consent
cannot do so now in excess of the higher of 20 per cent of the total
assets of the undertaking or 10 per cent of the company's total
assets in any financial year. It is unclear as to what is to be
achieved with this amendment, as it appears that the board cannot now
transfer or dispose off the company's assets beyond the prescribed
limit even if it is in consonance with all the shareholders. The
power of the board to declare dividends and interim dividends under
Section 205 is also subject to restrictions. One, if in any financial
year the board proposes to declare dividend out of the reserves, as
per the Bill, such declaration shall be made only in accordance with
a special
resolution of the board with the consent of all the directors present
at the meeting, and in accordance with a special resolution passed by
the shareholders at the annual general meeting. The approval of the
financial institutions that have made term loans to the company is
also required.
The Bill provides that
the amount of declared interim dividends should be deposited in a
separate bank account within five days, and that these cannot be
revoked or modified once declared. These hurdles can be a hindrance
to the declaration of dividends, and may, in fact, affect investors.
Enhancing investor
protection
The Bill has introduced
several provisions to protect investors. Sub-clause (6), which has
been added to Section 72 of the Act, prevents the revocation
of applications made by promoters, directors and their relatives to
subscribe to the securities of the company in pursuance of a
prospectus issued to the public. The Bill also prescribes for
attachment of the bank account or accounts of any intermediary or any
person associated with the securities involved in violation of any of
the provisions of this Act, rules or regulations by the Centre in the
interest of investors and the security market.
The penalty for various
offences under the Act has been enhanced, and more persons connected
with the company, including the chief accounts officer, debenture
trustees, share transfer agents, bankers, and merchant bankers — in
respect of the issue or transfer of any
securities of the company — have been brought within the definition
of "officers in default". The Bill also imposes several
restrictions on remuneration and loans to the directors.
The Bill has further
introduced provisions to deter fly-by-night operators and prevent
companies from vanishing suddenly. The Bill stipulates that two
recent photographs of all subscribers to the Memorandum and Articles
of Association as well as those of the witnesses
should be affixed to the same and signed, and submitted along with
the subscriber's proof of identity. These clauses are positive
amendments and seem to be well thought out. However, others appear
unreasonably restrictive and may need a re-think.
For instance, a proviso
to Section 3 (5), which makes the liability of every director,
manager and shareholder of companies that are not carrying on
business or
in operation even after its name is struck off in accordance with
Section 560, seems to be too harsh. Further, the inclusion of
shareholders among persons held liable goes against the very grain of
the protection that the Bill proposes to provide the investors.
The
Bill defines independent directors as a separate category. The
newly-added Section 252A lays down that an independent director has
to be someone who inter
alia did
not have any previous transaction with the company, and does not hold
2 per cent or more of the company's securities
having voting rights. Further, an independent director cannot be a
person who has been a director or independent director for nine years
or more. This requirement will disqualify many persons with
considerable corporate experience from being appointed as independent
directors thereby preventing them from providing valuable input to a
company's growth, especially public companies having a paid-up
capital and free reserves of Rs 5 crore or more, or a turnover of Rs
50 crore or more, as the Bill makes it mandatory for a majority of
directors that constitute the board of such companies to be
independent.
Transfer of shares
Restrictions imposed on the
acquisition and transfer of shares, including those held in a foreign
company by certain body corporates, individuals and firms appearing
in Sections 108A through Section 108H, have been removed.
However, by the
addition of a new sub-clause to Section 111, the Bill makes an
absolute stipulation that a private company shall not approve the
transfer of any shares
unless it is approved by all the shareholders at its meeting.
This Mclause could
effectively prevent the smooth transfer
of shares in a private company by empowering even a single
shareholder to stall the proceedings relating to the transfer of a
single share.
The endeavour to reform company law by laying emphasis on enhancement
of investor confidence and strengthening of corporate governance
practices are commendable.
However,
in order to encourage the growth of a progressive economy and boost
market
activity, the framers must keep in mind that investor protection must
not be at the cost of the
smooth functioning of companies.
Additions
proposed by Irani panel
1. Many views
were expressed, including the view that administration of the legal
framework in respect of certain specified companies, such as listed
companies, should be de-linked from the Companies Act and entrusted
to specialised regulating agencies, e.g., the capital market
regulator. Views were also expressed that it was not feasible for an
enactment containing general governance principles to address the
specialised requirements of operation of entities in the new
environment. After considering these views at length, we are of the
view that such opinions do not take into account the nature and scope
of corporate governance, which goes far beyond actions limited to any
specialised activity, say, for instance, access to capital.
Comparisons of the Indian situation with the practice in some other
jurisdictions, taken out of context, would also not be well-merited.
For instance, in some jurisdictions, the federating entities enact
their own independent Company Law. The wide mandate provided to the
capital market regulator in such a situation, enables access to
capital by corporate entities across the length and breadth of the
country on the basis of common norms. Similarly, recent enactments in
many countries cannot be seen in isolation to the judicial system and
its associated processes in such countries. The impact of such
legislation in terms of compliance costs imposed on corporates is yet
another issue that would need to be addressed keeping in view the
relevant environment.
2. Indian corporates do not face a similar situation as prevailing in some other countries since the Indian Companies Act is a central legislation. It should appropriately remain so. The “sovereign vacuum” created by withdrawal of the Central Government from any area of corporate operation and entrustment of the same entirely to a
regulator may generate demands in the Indian Federal system for State legislations on the subject, which we feel could lead to duplication and confusion. Further, regulatory urge to control corporate governance often becomes intrusive, posing serious regulatory risks in addition to inhibiting the freedom for decision making necessary for corporate functioning.
3. The extent to which models in operation in various other countries are relevant to the Indian situation needs to be carefully examined before any aspect is incorporated in the Indian framework. While emphasising the need for incorporating international best practices, we feel that there is a need to develop an Indian model, suitable to the Indian situation, that provides an adequate solution to the pressing concerns of corporate operation, without affecting the efficiency or competitiveness of business in India.
4. Corporate entities should be able to refer to a compact, easily understood, comprehensive compilation of legal requirements before they start operation. It would not be appropriate to develop different frame works for corporate entities on the basis of their size, nature of operations, manner of raising capital etc. Business entities keep on changing their form and structure from time to time as they grow and also need to adapt to the changing business environment in response to competition, technological change and requirements of operation in the international arena. Presence of differently administered frameworks would be an obstruction to change. This would also result in inter-agency overlaps and conflicts of jurisdiction. Besides, each framework would have its own compliance structure, leading to duplication of effort on the one hand and uncertainties and regulating risk for the corporates on the other. Eventually it would make adaptation to change slow and compliance costly.
5. it is important that the basic principles guiding the operation of corporate entities from registration to winding up or liquidation should be available in a single, comprehensive, centrally administered frame work.
6. single corporate law framework for application to all companies. The requirements of special companies e.g. small companies, could be recognised through a scheme of exemptions.
