May 30, 2020
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No Act Of Corporate Democracy

The Companies Bill does little for shareholder protection, though industrialists do benefit

No Act Of Corporate Democracy

"Shareholders have been ignored."
"Companies have no freedom."
"The government is a dictator."

THESE are some of the reactions to the much-awaited Companies Bill. Tabled in the Rajya Sabha in the last hours of the Monsoon session of Parliament, the Bill appears to have failed to fulfil its promises of providing a better corporate environment and lifting the sagging morale of the corporate sector.

The Companies Act, 1956, has been under attack for many years for being archaic and not in tune with changing times. The new Bill was thus seen by industry as a means to healthy growth post-liberalisation. It was to bring out the latent dynamism of Indian companies and enhance shareholder value.

To a great degree, it has done just that: buyback of shares and non-voting rights have been allowed, an investor protection fund has been created, and auditors and nominee directors of financial institutions have been brought under the definition of officers in case of default ( see box ). Even so, captains of industry and investor protection groups feel that the government has wasted its best chance to promote dynamism. Says Hemant Batra, a corporate lawyer and partner with Kesar Dass B. & Associates: "The government has reduced the law to being merely a management tool. No protection or benefit has been given to share holders under the new law." This, he feels, goes totally against corporate democracy as there are very few provisions in the new Bill that further the interests of shareholders. "The Bill is the result of the efforts of industrialists and politicians and, therefore, upholds their interests only," he asserts. S.B. Gupta, head of Company Law at FICCI, feels the corporate sector has been betrayed by the Bill. "The government should stop being a regulator and a dictator and start being a facilitator or an advisor. It should let corporate democracy prevail," he says. According to Gupta, the benefits given to industry have been marred by the unnecessary controls imposed on it. However, the government's effort towards cleaning up the Act cannot be undermined. Several new provisions in the Bill—introduction of non-voting shares, for instance—have been introduced at the behest of industry itself. These, according to a CII spokesperson, will make the new law more flexible, simplified and a more rational version of the existing statute. It will also enable companies to utilise funds with greater efficiency. An important part of the Bill has been the designing of clear-cut roles for the Department of Company Affairs, SEBI and the Company Law Tribunal. This should result in fewer inter-departmental controversies and duplication of work. The government claims that it has taken into account the genuine criticism of the Bill and provided enough for good corporate governance. Steps have been taken to promote corporate democracy, including the rationalisation and simplification of depreciation rates, the introduction of national accounting standards and empowering the government to allow postal ballots in special cases. The Bill has also brought listed plantation firms—currently obscured by clouds—under SEBI purview. The existing law, formulated in 1913 and recodified in 1956, was one of the most voluminous pieces of legislations in the Indian statute book comprising 658 sections, 15 schedules and an amalgam of complex rules and procedures. Amendments in 1988 and 1993 failed to make the law user-friendly and concise. Even after the recent overhaul, the proposed Act remains one of the largest statutes of the Indian legal system. Though the new law will reduce the number of sections to about 457, the working group has only clubbed old provisions under other heads. The number of pages in the new Act will remain more or less the same. What has added to industry's gloom is the turnaround from the draft Bill, which they had welcomed with open arms. According to an Assocham spokesperson, while the government was very cooperative in the working draft, the final version was a reminder of its high-handedness. And bad timing. Despite a detailed exercise on revamping the statute, in the end, the necessary adjustment to the draft could not be made as the government was in a tearing hurry to present it in the monsoon session. Sadly, even the mere introduction of the Bill in Parliament was a touch-and-go affair. The Bill was tabled in Parliament at 5 pm on August 14 despite the fact that it was cleared by the cabinet on August 5. The Department of Company Affairs received a copy of the Bill only at 1 pm the same day, giving the Bill four hours for circulation—against a mandatory provision of 72 hours—among the members of Parliament. The Hindi translation of the monolithic Bill is yet to be complete. With the midnight commemorative session taking precedence, the introduction of a Bill with serious repercussions became a timid formality. So, while India celebrated 50 years of independence, industry was left seething. Reasons:

  •  The retirement age of managing directors and directors has been fixed at 65 years, though the industry was against any limits.

  •  Buyback of shares has been allowed only for restructuring the equity, while corporates wanted this clause for other reasons, primarily treasury functions.

  •  Managerial remuneration and sitting fees of directors have been fixed, against the wishes of industry.

  •  Intercorporate loans are limited to 60 per cent of the firm's net worth—the corporate sector had wanted complete freedom.

    Not all these demands are reasonable. And experts feel that the new Bill is tilted heavily in favour of managements, giving very little to employees and shareholders. They also feel that the new Act would open new avenues for corporate manipulation by managements. Says Batra: "The government has retained what it wanted to and the industry has obtained what it demanded. If anyone has lost anything, it is the shareholders." According to him, there should have been more transparency in the new Bill, which should have been formulated keeping shareholder protection as a primary objective in the present era of scams. To an extent, Batra is right. Consider: 
    Section 108 A has been introduced in the proposed Act to prevent hostile and camouflaged takeovers. In the new Bill, Section 279 provides that only the managing director, director or manager can stall such a development. The shareholder has been kept out of this. Only section 275(c) provides that a shareholder can appeal against a takeover after it has taken place. 
    Earlier, any person with an outstanding due of Rs 500 and above against a company could move the winding up court against the company. The limit has now been raised to Rs 5 lakh. While this is aimed at getting rid of unnecessary litigation—perhaps rightly so—it will now give a firm substantial protection against debts.
    Status of relatives:
    The old Act debarred directors' relatives from appointment, promotion and holding office of profit. It defined relatives in 22 different categories. The proposed Act has only 11 categories certified as relatives. Sons-in-law and daughter's daughters cease to be relatives and, hence, can be nominated to an office of prominence in a company by a director. The most notable aspect of the new Bill is that it makes political contribution by the industry totally legal. Section 293A in the existing Act banned donations by public sector companies and limited such contributions by all private firms to 5 per cent of their operating profits. The provision, much-debated during the polls last year, stands deleted in the proposed Act. The lack of investor protection mechanism has come as a bit of surprise for most who expected the proposed Act to be investor and shareholder-friendly. And with the provisions remaining rather the same except for a few adjustments to suit industrialists (however much they complain) the much-publicised revamp of the Companies Act has failed to live up to expectation.  

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