Companies Bill, 2009: a bulwark for an economically resurgent India

The newly appointed Minister for Corporate Affairs, Murli Deora, suddenly seems to be a man in hurry. He wants to rush the Companies Bill, 2009, through Parliament in the budget session. Given the long time that has elapsed in the attempts of the government to enact a new company law, nobody should fault Mr. Deora. However, a poignant question needs to be answered to make such efforts of the Minister meaningful. Is the Companies Bill, 2009, an effective bulwark against the challenges of an economically resurgent India? The answer lies in the Bill itself that addresses the following strategic questions:

Should the government control the company law through excessive delegated legislation? With the implosion of mind boggling corruption and nepotism in various wings of the government coming to light in recent times, it is not at all desirable to arm the Ministry of Corporate Affairs to be both the legislator and the administrator of the company law. This is what the new Bill seeks to do by providing for excessive delegated legislation. The present company law has 658 Sections, which has been reduced to 426 Sections in the new Bill by providing for 233 cases of delegated legislation. While in the name of flexibility such an excessive legislative delegation may be justified, this could well open the sluice gates of incredible corruption and cronyism, taking away even a semblance of a level playing field. In a rising economic India, such a thing would wreck havoc. Government made rules in India have scarcely illumined the law on the subject, needless to say that these rules have only added to the prevailing confusion in the law. The powers that be should look at this aspect of the Companies Bill, 2009, deeply. Any dilettantism in this regard by the government would almost make a mockery of the new company legislation.

Should the government compromise on corporate governance? One of the greatest paradoxes of present times is that the Companies Bill, 2009, which is promoted by all and sundry on the plank of corporate governance, actually compromises corporate governance. Clause 132 of the Companies Bill, 2009, says that an independent director can have transactions with the company of which he is an independent director up to 10 per cent of the company's annual turnover. Typically, this 10 per cent could mean transactions well over Rs.1,000 crore every year with such a company. By any stretch of imagination can such a person ever act independently on the board in utter disregard of his transactions with the company? Commonsense tells such a person can never act independently on the board of the company since his main interests lie elsewhere. Even the Standing Parliamentary Committee examining the Companies Bill, 2009, has not fully grasped the full import of this.

On the other side, the Nagarjuna Finance episode has shown that independent directors can be easy targets for vendetta politics. Such a thing would certainly keep away good and credible independent directors from joining company boards. The Companies Bill, 2009, has not addressed this by providing an immunity of sorts for independent directors from such persecution. This definitely lowers the level of corporate governance.

Shareholder activism

One of the ways to improve corporate governance is to empower shareholder activism. The effective way of doing this will be to introduce statutory provisions to allow derivative action by shareholders for the wrong doing of the directors and company insiders, which is funded by the company itself. To avoid frivolous derivative actions suitable checks and balances can be put in place like the provisions in the Companies Act, 2006, of the U.K. While class actions in a diminutive form has been provided for in the Companies Bill, 2009, derivative action is a more powerful weapon to spur shareholder activism against the wrong doing of companies. Such a provision would certainly raise the existing standards of corporate governance in India.

Should big corporate frauds be handled by the Central Bureau of Investigation? The case of Satyam fraud shows that the CBI is not the most competent investigative agency to handle big corporate frauds. While the accused in this case have been arrested and rearrested almost on the basis of a confessional statement by the main accused, it is doubtful whether the CBI has yet been able to crack the main aspects of the Satyam fraud. This may not be entirely the fault of the CBI. Being a corporate fraud of a complicated nature, only a competent and focussed serious fraud investigative agency consisting of forensic accountants, investigating corporate lawyers and police officers with cutting edge competence in detection of serious frauds could have been expected to crack the Satyam fraud in some measure. The Companies Bill, 2009, does not provide for the creation of a serious fraud investigative agency with necessary statutory powers for its functions. In the absence of such an agency, big corporate frauds can routinely rock a resurgent India where a dominant minority could take away a significant portion of the wealth created by the country to the utter helplessness of the millions. This definitely should not be allowed to happen.

There already exist provisions in the present company law for inspection of companies for detection of wrong doing. These provisions have been routinely abused for extrinsic reasons. It may come as a shock to many in this country to know that even Satyam was inspected under these provisions not long ago before the fraud broke out and was given almost a clean chit. Unless these inspections are taken seriously by all concerned and are conducted by people with impeccable competence and integrity, the preventive measures against big corporate frauds can never sustain. The same provisions can be tweaked to provide for inclusion of reputational agents like well known audit firms and corporate lawyers to conduct inspections under the direct charge of the Joint Secretary concerned. The Companies Bill, 2009, does not address this aspect in any way.

Justice delivery system

Should not a credible and competent corporate justice delivery system be put in place? There is a lot of truth in the axiom that law is as good as it is enforced. No matter how good the law is, poor and delayed enforcement of law makes it a mockery. The case in India is that of delayed and poor enforcement. The higher judiciary in India has definitely played a good role in raising the bar in the interpretation of the company law.

However, weighed down with a docket explosion and a lack of specialist focus, the higher judiciary has not been able to play an important role in the corporate justice delivery system.

The Company Law Board thus came about. However, the track record of the Company Law Board in the corporate justice delivery system has been a mixed one. The Companies (Amendment) Act, 2002, brought about the idea of a National Company Law Tribunal (NCLT) along with a National Company Law Appellate Tribunal to reinforce the collapsing corporate justice delivery system. This legislation has been mired in judicial controversy for a long time until the Constitutional Bench of the Supreme Court gave its final verdict legitimising the formation of the National Company Law Tribunal and the National Company Law Appellate Tribunal in a holistic manner.

The Companies Bill, 2009, has to be revised to capture the letter and spirit of the judgment of the Constitutional Bench of the Supreme Court in the NCLT matter. However, a year on after so many scams have broken out within the government, it looks wise to reinforce the corporate justice delivery system within the folds of the higher judiciary by creating specialised Benches for corporate law like the Chancery Division in England. To unlock value in liquidation matters which are more administrative in nature, liquidation matters can be taken away from the higher judiciary and placed in the jurisdiction of an expanded Company Law Board with private liquidators handling the matters. Such an approach should result in a credible corporate justice delivery system.

The Companies Bill, 2009, should be revised taking into account the sensible recommendations of the Parliamentary Standing Committee's report on the Bill, and the four strategic issues outlined above. For a government, which is under attack on account of various scams, this is a good opportunity to show its sincerity of purpose to the people of India by doing so.

LVV Iyer & Associates

He can be contacted at:

This article is closed for comments.
Please Email the Editor

Printable version | Apr 14, 2021 1:30:42 AM |

Next Story