Great expectations

Great expectations

Rahul Roy / New Delhi September 08, 2008, 5:03 IST

Given the initial press release by the government about the directions and the thrust of the now finalised Companies Bill, it is clear that potentially this has the ability to become the most significant piece of corporate legislation in the past few decades. From what is evident, there has been a structured thought process; targeted towards rationalisation of processes; clear separation of procedural non-compliances from substantive issues; leveraging and extending the Ministry’s highly successful e-enablement endeavours of MCA-21, for empowering corporate stakeholders.

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Of particular interest would be the efforts to spark investor activism and enable investors to take part in “class action suits”. Companies, the legal systems of the country and investors would have to mature overnight in this brave new world.

From early indications, the profession of independent valuers will receive a great fillip. Right from valuation of non-cash considerations for allotment of shares to fair valuations in case of business combinations, and valuations of property, plant and equipment, intangibles, as well as off Balance Sheet assets and liabilities – valuers would play a most critical role. The valuation profession would have to step up to the plate as corporate India looks set to be entering the subjective world of fair valuation. Uniform valuation standards and oversight would be required, but above all, the country would need many more valuation professionals.

It is a bit of a let down that early pronouncements , while talking in somewhat great detail about the convergence/adoption of international best practices on trade law and valuation frameworks, skirts the issue of convergence of global accounting and auditing frameworks. There have been statements on recognition, of both auditing and accounting standards. This seems to indicate that the Act may still retain the right, to prescribe through subordinate legislation, the accounting framework. This falls short of the MCA’s self declared position of converging to IFRS by 2011. However, pending availability of the entire Act the jury is still out on this one.

Preliminary indication of procedural de-bottlenecking, like speeding up the incorporation process, removal of limits in the number of partners of professional firms, and providing a single forum for approval of all mergers and acquisitions were overdue and are welcome. But, as with most such good intentions, final judgement would await actual execution. The challenge is whether the mind sets and skill sets of the officials implementing these can be changed overnight.

When discussions on this Act begun a couple of years back, there was great focus on reducing the size of the Act and the number of sections. The temptation to achieve this by liberal use of the “as may be prescribed” phrase appears great. This would leave the door open for proliferation of rules and regulations and frequent amendments therein. If this happens, very soon we are going to land back again in a web of complexity which the present Act wants to undo.

For the first time in recent memory, initial news of the provisions in the new Act have sounded the right notes and raised great expectations. We hope we shall not be let down.

The author is director, Ernst & Young India Pvt Ltd. The views expressed herein are his personal views and do not necessarily represent the views of Ernst & Young Global or any of its member firms.

Expect many a slip between the cup and the lip

Expect many a slip between the cup and the lip New Companies Bill Somasekhar Sundaresan / New Delhi September 8, 2008, 5:01 IST At long last, a new company law in the form of the Companies Bill, 2008 has been cleared by the Union Cabinet for tabling in Parliament. The media is already full of expectant praise based on claims in the official press release and public statements of lawyer ministers in government. Also Read News Now Paper Specials - Mamata ends stir, farmers to get land - Lobbying begins for the last lap of nuclear deal - Capex spends may drop by 30% in FY09 - RBI may agree on release of inflation data on monthly basis - Rising interest rates to eat into infra firms’ profit - Alembic seeks allies in US to double sales More Also Read News Now Paper Specials - Monsoon watch : Will the rains be adequate this year? - Fighting Inflation : Inflation at a 13-year high - Your Money : Personal finance - Credit Policy : RBI’s monetary policy review - Tracking the downturn : Economic slowdown and its impact - Time Out : food, travel, sports, health… More However, there is a good chance that the bill will not become law any time soon. It is only when the details of the draft law come out that the interests for and against change would get arraigned for lobbying. In an election year, a law governing corporate India would be the least of the concerns of political parties desperate to either stay in or to usurp power. Companies Bill 2008 A CHRONOLOGY 2003 Companies Amendment Bill, introduced in Rajya Sabha. A decision for a comprehensive review of the companies Act,1956 taken. August 2004 A concept paper on new Company Law placed on the ministry website. December 2004 The Ministry of Corporate Affairs takes up a comprehensive revision of the Companies Act, 1956, under the JJ Irani committee. May 2005 The committee submits its report to the government. August 2008 Companies Bill, 2008, approved by the cabinet for introduction in Parliament. A new company law has been talked about not just in the past few years (thanks to the Irani Committee recommendations on the subject), but right since the mid-1990s when the Deve Gowda government featuring the same finance minister too received a completely new draft law from a special task force. The extant company law is materially based on its predecessors under the British rule. Many antiquated provisions left behind by the British continue to govern India even while the UK has repeatedly replaced its company law. Add to the legacy, a bunch of interventions during a long tenure of socialistic policy regime, and you have a messy law with over 660 provisions. One can only hope that some key long-pending issues would get addressed by the proposed law. KEY PROVISIONS Facilitates joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms, banking companies etc. to a maximum of 100 Duties and liabilities of the directors spelt out. Every company to have at least one director resident in India. The Bill also provides for independent directors to be appointed on the Boards of such companies as may be prescribed, along with attributes determining independence. The requirement to appoint independent directors, where applicable, is a minimum of 33 per cent of the total number of directors. Companies not to be allowed to raise deposits from the public except on the basis of permission available to them through other Special Acts. The Bill recognises insider trading by company directors/KMPs as an offence with criminal liability. A single forum for approval of mergers and acquisitions, along with concept of deemed approval in certain situations. Shareholders associations/group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and ‘Class Action Suits’. Source: Press Release, GOI First, there has been significant abuse of a provision that was intended to strike at the root of vested interests that did not want free transfer of shares. Company law provides that shares of a public limited company shall be freely transferable. Views of varying intensity abound over the interpretation of this provision. Many have taken positions that could only mean that any contracted fetter or encumbrance over the shares of a public limited company would be void. Even where restrictions on transfer of shares are embedded in the charter documents of the company, there are practitioners who argue that such restrictions would be repugnant to Indian company law and hence void. This position needs to be cleaned up since the right to property includes a right to do anything or refrain from doing anything with that property. Second, Indian company law prohibits the provision of security by a company for purchase of its own shares. Therefore, leveraged buy-outs, although commonplace in mature markets, still face a barrier in India, thanks to currently applicable provisions. Third, liquidation and winding up procedures are a mess. Even where all shareholders and creditors are ready and willing to voluntarily wind up a company, effective completion of a winding up takes many years. The high courts continue to wield jurisdiction over schemes of arrangement, reduction of capital and winding up, despite amendments many years ago to transfer jurisdiction to special company law tribunals. Expectedly, the nation of over a billion people does not have the necessary number of competent individuals to man these tribunals. Fourth, provisions that micro-manage and regulate governance of companies abound, making Indian company law a classic example of over-regulation and under-enforcement. The government still plays a major role with powers to approve various business decisions such as remuneration and contracts. Fifth, draftsmen of company law have tended to compete with securities laws in legislating identical matters. Rules governing preferential allotment by unlisted companies, the threat of provisions imposing requirements to have independent directors, and now the reported measures to deal with insider trading, all under company law, are cases in point. It is only when the bill is published that one would know what precisely lies in store. Meanwhile, this column is not very enthusiastic or expectant of change. There can be many a slip between the cup and the lip. The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.