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It`s time to repair the crumbling Companies Act
December, 25th 2007
Looking back on 2007, an earlier column on English company law which has been constantly evolving to keep pace with policy changes, came to my mind.
While India projects itself as an emerging economy, nothing has moved since 2001 except online filing. Our Companies Act 1956 (Act) is badly in need of a revamp. At fifty plus, it has undergone several piecemeal, inconsistent amendments, creaking under the burden of poor referencing and redundancy.
The Act was amended in quick succession in 1998 and 2001 to introduce the basics of corporate governance, unshackling government control in indoor management affairs, and removing dead-wood such as the concept of Managing Agent.
The Companies (Amendment) Act 2002 brought in more fundamental and critical changes; the creation of the National Company Law Tribunal (NCLT) represented a change in jurisdiction Over time, the High Courts company jurisdiction has been whittled down to mergers and liquidation, with considerable judicial time being spent in ministerial matters, while the meaty minority oppression cases are decided by the bureaucracy-dominated Company Law Board.
The other important change was in substantive law the repeal of SICA, the controversial insolvency legislation the creditors nightmare and the debtors delight where a moratorium was unending and NPAS piled up in the Lenders balance sheet.
The amendment sought to graft and combine insolvency and bankruptcy provisions in the Act itself, and in a knee jerk reaction did away with the moratorium concept entirely. Till date neither change is operative. While the jurisdiction issue is a power struggle, SICA has been effectively eclipsed by SARAFESI, mollifying secured creditors while unsecured creditors never had a chance anyway
Contemporaneously, there was another still-born law, the Competition Act, 2002 which sought to replace the obsolete MRTP Act, and dismantle the MRTP Commission. Several sections of the Act were notified in 2003, yet the Competition Commission continues till date as a toothless tiger, with the Commissions selection of members mired in litigation.
The Competition Amendment Bill 2007, recently passed by Parliament introduces several new provisions, particularly on the selection process and establishment of the Competition Appellate Tribunal and its powers.
A significant change is that of merger controls and threshold limits with new specifications for cross border combinations mandatory intimation requirements. Till this is in place, Indias emerging market is virtually free of merger controls, except a small item tucked away in the Act.
There have been two high powered committees since Naresh Chandra (NCC) and JJ Irani. The NCC Report was hailed as a prototype of Sarbanes OxLey, ushering in a new concept in corporate governance. The Amendment Bill 2003 which sought to address statutory auditor company relationships and probity in financial statements was drafted and introduced in record time. The board composition recommendations invited fire from all quarters, particularly the powerful promoter lobby. And with general elections around the corner this Bill was dropped unceremoniously.
Soon after assuming office in 2004, the new Government took the initiative to release a new draft Companies Act, the Concept Paper (CP). This is possibly the best effort till date, with unceremonious deletion of redundant provisions, regrouping of scattered sections and de-linking procedures from substantive provisions.
As a synthesising exercise, it was an achievement and path breaking in recognition of video and telephonic board meetings, and electronic filing, a reality today. It was a law in sync with India Incs image.
The Irani Committee (IC) was constituted and submitted its report in mid- 2005. The IC Report was loaded in favour of the promoter lobby who welcomed the proposal of reduction of independent directors to one third of the board, against the 50 per cent suggested by NCC and stipulated in clause 49 of the Listing Agreement. The IC also observed in situations of conflict between the ACT & SEBI regulations, the former would prevail- which delighted many.
Till date only two of ICs recommendations are in the implementation mode not core reforms, but extension of corporatisation to partnerships and individuals.
The LLP bill has crossed the hurdle of the Standing Committee. But, by making this structure available to all and sundry, without any minimum capitalisation norms, and placing all sectors on the same platform, problems are bound to crop up.
On the anvil is the Companies Amendment Bill, 2007, ostensibly a recycled version of the CP, which the Minister has promised to be a simplified and business like law. But with elections due in 2008, one wonders if this will see the light of the day
Kumkum Sen
The author is a Partner in Rajinder Narain & Co. Views expressed are personal
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