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A dissection of government company
August, 24th 2006
Section 620 of the Companies Act is not only anachronistic but also denies the rights of minority shareholders -------------------------------------------------------------------------------- If we take a government company having public as minority shareholders, an anomalous situation is created wherein all the powers are vested in the Central Government without checks and balances. -------------------------------------------------------------------------------- The Government enjoys some extra-constitutional powers under the Companies Act, 1956, a thorough overhaul of which is long overdue. Sections 390, 391, 392, 393, 394 and 394A of the Act deal with compromises, arrangements and reconstructions. Section 394, in particular, vests the tribunal (previously the High Court) with powers to sanction compromise or arrangement and make provision for a series of matters as provided in the section. Section 394A provides that the tribunal shall give notice of every application made to it under Section 391 or 394 to the Central Government, and shall take into consideration the representations, if any, made to it by the Centre before passing any order under any of these sections. These sections are quite clear and provide adequately in matters of compromise, reconstruction, arrangement, mergers, etc. However, a twist is given by Section 620 and the notification issued thereunder. Under the modification, as provided by the said notification, instead of the `Court' (or Tribunal) as understood under the Companies Act, 1956, it would be the Central Government, which has the power to sanction schemes of amalgamation for amalgamating two government companies as understood under Section 617 of the Companies Act. Interestingly, even if public participation reaches a whopping 49 per cent shareholding in a company, still the company would be termed as a `government company' and the procedure adopted as per the said notification would be applicable, thereby leaving the individual/public shareholders no option but to accept the amalgamation. With liberalisation and emergence of public participation in government companies through the disinvestment process (Navratnas, for instance) or emergence of joint sector undertakings in diverse fields such as refineries and power generation, the continuance of Section 620 and the notification issued thereunder create an untenable situation. Notification GSR No. 238, dated February 2, 1978, contemplates that wherever the word `Court' appears the same would be replaced by the word `Central Government'. Readers may notice the anomalous situation created by the Notification read with Section 394 A, inserted vide Act 31 of 1965, Section 50 (w.e.f. October 15, 1965). An anomalous situation Thus, a peculiar situation has been created wherein the Central Government, which is an interested party in the transaction, as both the companies are government companies, is also the recommending agency in terms of Section 394A. Further, the Government has also been made the final adjudicating authority for sanctioning the scheme. If we take a government company having public as minority shareholders, an anomalous situation is created wherein all the powers are vested in the Central Government without any checks and balances, which would amount to violation of the basic structure of the Constitution, inasmuch as: a) The executive usurps the power of the courts; b) Allows a clear case of conflict of interest where the Central Government, a directly interested party, is the recommending authority agency as well as the adjudicating authority; c) Principles of natural justice are violated; d) It gives unrestricted power to the Central Government making the objective principles of Sections 391-394A meaningless. Section 394A confers only the power to recommend and such recommendation is not binding on the court and that too where private parties are involved. However, in the case of government companies, by virtue of Section 620 and the notification, the Government is the litigant, recommending authority and judge all at the same time. e) Clinging on to Section 620 and the notification in the changed circumstances is nothing but a case of misuse of powers out. One need not be a legal luminary to appreciate the anachronism; even a common man can make out that the law and the notification give unbridled control to the Government. One cannot question the rights of the Government to do what it wants to do with its own companies as long as they are all 100 per cent owned by it. The provisions of the Act and the notification are unassailable as long as the Government is the sole shareholder of such government companies. However, when there is public participation in such government companies, doubts arise as to whether the provisions are constitutional or not. Can the Government be at the same time an interested party as a shareholder, an arbiter and a judge merely because it passed a law a few decades back when the concept of public participation in government companies was unknown? The shortcomings Section 620 of the Act is not only anachronistic but also denies totally the rights of minority shareholders. Second, it is hardly appropriate for the Government to tell the private sector about safeguarding of minority shareholders, even as it acts to the contrary when it comes to government companies, denying all principles of corporate governance. Third, the process of disinvestment will create several government companies with public participation as minority shareholders. Inviting subscription to public issues but denying them their legitimate rights will amount to fraud on the minority. Fourth, it is equally important to assure overseas participants in the disinvestment that their interests will be safeguarded rather than denied. And, fifth, the matter is so fundamental that it may be appropriate to revisit the very definition of `government company' rather than continue with an anachronism indefinitely. S. Venkatraman (The author, a chartered accountant, is associated with the National Investors Foundation.)
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