The Companies Bill, 2008, did not have any big ideas
Company Law Reform on the U.K. model will be not only faster but also effective and truly global in nature.
The proposed takeover of the beleaguered Satyam by Tech Mahindra in a record 100 days has removed the impression that Indian Company Law is ineffective. In this case, all the constituents which had to administer Company Law played on effectively. The result was a feat of sorts!
It is not the Company Law as such that is ineffective in all cases; it is its administration that is ineffective in most cases.
The Companies Bill 2008, except for its over arching obsession with cutting down the size of the extant company law, did not have any big ideas; the Companies Act, 2006 of the U.K. has in fact increased the size of the Act to 1300 sections and 16 schedules. Had Companies Bill 2008 been enacted into law, the intensity of Company Law and corporate governance regulation would have stood considerably diluted.
Companies Bill 2008 is the third abortive attempt to recodify Company Law in this country in a span of two decades.
It is the antiquity of the legislation which seems to bother the powers that be more than what the legislation does not provide for. It may be said that the successive amendments over the years have made the core of Indian Company Law quite relevant and contemporary.
Whilst the amendment to provide for national company law tribunals (NCLTs) in all State capitals to take over the jurisdiction from the High Courts was not a bad idea the way NCLTs were sought to be administered plunged the whole matter in a constitutional controversy before the Supreme Court.
It is time the country broke with the past. As one of world’s leading emerging economies India can ill afford a rickety administration of Company Law. While the Companies Act, 1956 could be amended to harmonise with contemporary practices of advanced countries like the U. K., it is mostly its administration in this country that needs a total overhaul.
Section 172 of the recently enacted Companies Act, 2006 of the U.K. mandates a holistic directorial approach to corporate governance: a director has to promote the success of his company by acting in good faith and in a manner which is in the interest of the employees and fosters the company’s business relationship with suppliers, customers and the community at large. This section forms the cornerstone of a sustainable corporate governance model. Similar provisions must be enacted in Indian Company Law.
One of the real reasons for the lack of corporate accountability and transparency in India is the absence of shareholder activism. Shareholder activism can be galvanised with statutory force for derivative actions.
The provisions of the Companies Act, 2006 of the U.K. relating to derivative actions can be drafted suitably into our Company Law.
Like the English Act, our Company Law should also introduce the concept of realised profits. Any remuneration to directors or any dividend paid should be only out of realised profits. This will promote healthy corporate growth. One of the deficiencies in Indian Company Law is the absence of an effective mechanism to prevent creative accounting and dubious governance practices in the course of a restructuring exercise. This deficiency to a large extent can be cured by introducing the requirement of an expert report on accounting and other governance matters in restructuring of listed companies. Like the provisions of the Companies Act, 2006 of the U.K. corporate governance regulations can be given statutory teeth through powers for the Securities and Exchange Board of India to codify such regulations.
Top-notch corporate lawyers, corporate accountants and company secretaries can be drafted as private liquidators and inspectors under Company Law. The beneficial outcomes in the U.K., in the administration of corporate bankruptcy laws through the appointment of professional private liquidators can be replicated in India too. Further, like under the U.K. Company Law, the assets of a company under liquidation can be made bona vacantia or property of the State to avoid the complications of having to pay VAT, income tax or other taxes in respect of such assets. Likewise, inspection of large companies under Company Law can be conducted by a top team of professionals like corporate lawyers, forensic accountants and others. The jurisdiction for liquidation of companies can be vested either in the expanded Company Law Board or in NCLTs since liquidation of companies is only quasi judicial in nature. This will unlock a lot of space and time for High Courts to deal with other important company matters.
For big corporate frauds, the Companies Act, 1956, should be amended to provide statutory powers to a Serious Fraud Office like the one existing in the U.K. with investigating teams consisting of corporate lawyers, forensic accountants and senior officers seconded from the police departments. Special courts should also be established to take care of fast track prosecution of big corporate frauds. Further, to curb recurrence, the statutory auditors report should state that in the opinion of auditors there is no material fraud committed by the company and that sufficient systems exist for early detection of such frauds.
Instead of having a Ministry of Corporate Affairs as a focal point for the administration of Company Law, an independent and competent Company Law Regulator can be put in place for its administration.
The independent regulator should be a credible professional of high standing experienced in the administration of public law.