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Cap on number of investment cos unlikely
October, 22nd 2007

The Ministry of Corporate Affairs (MCA), which is working on a new revamped Company Law, is unlikely to put a cap on number of investment companies a promoter or corporate house can float.

Official sources said that the new law, expected to be introduced in the winter session of Parliament, is likely to adopt the recommendation of the J J Irani Committee on the issue that no restrictions should be placed.

Instead, a regime for preventing misuse of this mechanism should be devised based on transparent Board processes and disclosures under close supervision of the regulator for listed companies, the committee has suggested.

In its examination of this issue, the committee had also considered the recommendations made by the Joint Parliamentary Committee (JPC) on Stock Market Scam on restricting the layers of subsidiary investment companies.

2001 scam

Armed with the experience gained out of the practice adopted by different players in the stock market scam of 2001, which had brought to the limelight the much abused investment company route for corporate control, the Government had considered restricting the number of investment companies that could be floated, in the Companies (Amendment) Bill, 2003.

At that time it was felt that there was a need to plug-in the loophole that allowed corporate houses to float several investment firms, which facilitated control of the shareholding by the promoters. The Bill has since been withdrawn.

Subsequently, the issue was deliberated by the Irani committee, which in its report noted that the JPC recommendations were in context of the stock market/banking scams witnessed in India over the past decade. In the present situation, when Indian companies were seeking to make investments abroad, such restriction would adversely affect their opportunities in the face of international competition, it had observed.

The intention to bring in any restriction is that it should serve an objective. After due deliberations it was found that putting such caps are not going to serve any purpose. It was felt that protecting legitimate business activity under a regime for setting up subsidiary companies would result in special carve-outs and monitoring the activities of such companies would become an administrative nightmare. For these reasons, the Committee took the view that limiting the layers of subsidiary investment companies was not feasible, sources said.

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