No need for new legislation; some fine-tuning of existing law can meet the desired objectives of reform
There is scope for reducing corruption through e-governance, making company law administration transparent, accountable and effective.
THE MCA-21 Initiative of the Ministry of Company Affairs facilitating e-filing of documents under Indian Company Law is commendable in many ways. First, this is perhaps the first time a government in independent India has moved swiftly to put in place a mechanism that is imaginative, technologically savvy and stakeholder friendly. In a record time of 60 weeks, the MCA-21 Initiative has gone live. Second, there is a good public-private partnership between the Ministry and Tata Consultancy Services (TCS) whereby the latter will man the front offices of all Registrar of Companies (RoC) offices across the country to facilitate easy stabilisation of e-filing of documents under company law.Last, inspection of any document relating to a company allowed under company law can now be done online from anywhere on payment of the prescribed fee. So far so good.
Role for e- governance
A major factor for the absence of transparency, accountability and effectiveness in company law administration in India is corruption in RoC offices and in the central bureaucracy in charge of company law. While e-filing will reduce public interface with RoC offices thereby minimising the scope for corruption, unless comprehensive e-governance embracing all aspects of company law administration is introduced, rule of law for the corporate sector will remain a distant dream. MCA-21 should be used imaginatively as a stepping stone for total e-governance. While e-filing of mortgages is possible today, it should be possible to secure a certificate of registration of mortgages through e-filing with a marginal change in the law. The approvals under the company law should be available through e-filing in one or two months. Wherever approvals are delayed or denied, clear reasons for the same should be posted on the ministry website. The plea of confidentiality to deny such information should be made very rarely. Whenever the Department of Company Affairs represents before the High Court under Section 394 A of the Companies Act, 1956 in respect of an amalgamation or de-merger of companies, its written representation should be posted on its website. These are some cases to illustrate the scope for reducing corruption through e-governance, making company law administration transparent, accountable and effective.
Once company law administration is brought under e-governance, the extant law as contained in the Companies Act, 1956 will not appear to be behind times. Tribunalisation has not met with much success in India. One of the drawbacks of tribunals in the Indian context is their perceived lack of independence in contrast to Constitutional courts. Unless this aspect is effectively tackled, no tribunal can replace courts. To that extent, the proposal to set up national company law tribunals in their present form will not serve the cause of the rule of law for the corporate sector. Further, the proposal for a new company law following the recommendations of the Irani Committee has to be pursued with caution as the same is likely to be stuck in judicial controversy over excessive delegated legislation. As almost 90 per cent of the Irani Committee proposals is already on the statute book, what all is required is some fine-tuning.
Time for a re-look
While companies should be free to shift their registered offices from one State to another, doing away with confirmation of the Company Law Board is not desirable given the peculiarities of the Indian corporate sector. The charge that such confirmation takes a long time is not warranted as in most cases it does not take more than 3-4 months. While the freedom to do business through many subsidiary companies should not be restricted as suggested by the committee, the requirement to co-opt an independent director of the holding company on the board of each subsidiary should continue, especially in the case of listed companies, to provide healthy oversight of their operations.The number of independent directorships a person can hold should also be set down in law. Ideally this number should be much less than ten. The committee has not recommended this.
The composition of the audit committee is quite important from a corporate governance perspective. Any dilution in independence and competency levels of the audit committee will directly impinge on the level of corporate governance. Hence, the committee's recommendation that at least one member of the audit committee should have knowledge of financial management or audit or accounts is not appropriate in the Indian context. The prescription in the revised Clause 49 of the Listing Agreement as mandated by SEBI for listed companies should be the law for listed companies as far as audit committees are concerned. The committee has rightly recommended the presence of one independent director as mandatory even at emergency board meetings. Such an independent director may be present in person or through video conferencing or some other electronic mode.The recommendation that the chairman of a meeting should have the power to overrule the demand for a poll under certain circumstances may go against the grain of corporate democracy. Instead the threshold eligibility for demanding a poll can be fixed at one-tenth of the voting power or shares of paid up value of not less than Rs. 50 lakh whichever is less.The committee has recommended that participation or non-participation by interested shareholders on a matter of business at general meetings should be left to the companies to make appropriate provisions in their articles of association. The credibility of company law as a tool of corporate governance rests precariously on such provisions. Hence it is important that interested shareholders of listed companies should be barred from participating and voting on such matters at general meetings.A recommended provision in company law allowing quasi loans to directors and funding of their expenditure to be repaid later will lead to pernicious practices.The committee wants the present Section 208 that allows payment of interest on share capital with Government approval should be deleted. On the other hand it should be retained given the peculiarities of the Indian corporate sector, with exemptions provided for infrastructure and other long gestation projects as may be prescribed.Today mergers in India are completed in 4-6 months barring notable exceptions. Hence, any change of law in this regard should be mad with caution. The recommendation to permit contractual mergers without the intervention of a court or tribunal is misconceived.
However, except for the few mentioned above, the recommendations of the Irani Committee are quite noteworthy. Past efforts of the government to re-codify the company law have failed miserably. And re-codification at this time may be a long drawn process with no commensurate results. With the notification of many of the provisions already brought in by the Companies (Second Amendment) Act, 2002 and some of the suggested changes of the Irani Committee being implemented by way of amendments to the Companies Act, 1956, company law reform may have been achieved to a large extent. It must be reiterated that any further reform can be attempted largely through the introduction of e-governance in the administration of the company law with minor amendments to the existing law.L. V. V. IYER