BUSINESS

Proposals of the Companies Law Committee – A case of good spring-cleaning

The Committee appointed by the Government of India to suggest changes in the Companies Act, 2013 and Rules made thereunder, in the interests of various stakeholders, has submitted its report.

On perusal of the report, one gathers an impression that the Committee has endorsed the core of the Companies Act, 2013.

Except for a few changes to the Companies Act, 2013, all other proposals, by and large, are clarificatory or correctional in nature.

Generic object clause

The Committee has suggested that Section 4 (1)(c) of the Companies Act, 2013 should be amended to allow companies to have a generic object clause to engage in any lawful activity or business as per the law for the time being in force. This proposal is based on Section 31 of the Companies Act, 2006 of the U.K. To supplant this English Law on to the Indian sub soil without regard to the ground realities of Indian business is highly misleading.

While Indian enterprise is legendry, it is also true that the wild propensities of some Indian promoters have many a time led to the phenomena of vanishing companies and sick companies with wealthy promoters. In the Indian context, a fundamental change in the business of a company without shareholders’ consent would not at all be in the interests of the investing public. Ease of doing the business should not be at the cost of the investing public. Hence, this proposal should be dropped.

Subsidiaries

The Committee has suggested that the present prohibition against more than two layers of subsidiaries for investments should be done away with.

While the Committee recognises that numerous layers of subsidiaries are created to hide the source of funds so as to siphon off money, the Committee has sought to omit this provision in the Companies Act, 2013 in order not to impede the efficacy of corporate structuring. The Committee has also said that with the new definition of ‘beneficial interest’ relating to ownership of shares in companies, the abuse of various layers of subsidiaries for illicit purposes would be contained.

When India is yet to tackle the humongous problem of black money, any provision in the existing law, which aims at addressing such a problem, albeit in a limited way, should not be done away with unless reasonable experience is gained in administering such a law over a period of 10–15 years. It is true that certain industries like in the infrastructure sector, multiple subsidiaries are required to conduct business.

To address such business needs, the Central Government may be empowered to allow such industries as may be prescribed to have multiple subsidiaries beyond two layers, instead of completely doing away with any prohibition on more than two layers of subsidiaries.

Independent directors

When it comes to independent directors, Section 149 of the Companies Act, 2013 says that an independent director cannot have any pecuniary relationship with the company in which he is appointed as an independent director or with its satellites during the last two financial years or in the current year.

A similar provision in SEBI Regulations for listed companies says that an independent director should not have material pecuniary relationship with a company or with its satellites in the last two financial years or in the current year.

The Committee has suggested that the test of materiality for the purpose of determining whether pecuniary relationship could impact the independence of an individual to be an independent director may be introduced in the law itself. On the face of it, this recommendation of the Committee may not seem unwelcome. However, given the ground reality in India that independence of directors is perceptibly not a common factor, any amendment to the existing law, which has the potential to reduce independence of directors, should not be supported at all, even at the cost of some inconvenience. The recommendation of Dr. Irani Committee to allow independent directors to have transactions up to 10 per cent of the turnover of a company of which he is the independent director, was fortunately not accepted and brought into law.

Now to allow a leeway in the law by providing a test for materiality may open up the Pandora’s Box. This may perceptibly weaken the institution of independent directors. Therefore, such an amendment in the law is not desirable.

Managing Director-Definition

The definition of a managing director under the Companies Act, 2013 is almost identical with the definition under the Companies Act, 1956. However, unlike under the Companies Act, 1956, under the Companies Act, 2013, the proviso saying that the managing director should be allowed to exercise his powers subject to the superintendence control and direction of the Board of directors, has been omitted.

The Committee has rejected a suggestion to insert the above proviso in the definition of managing director by saying that board’s oversight is implicit in the definition of the managing director itself even without such a proviso.

To reach such an unexplained conclusion in a litigious country like India may be counter productive. It is desirable to restore such a proviso in the definition of the managing director under the Companies Act, 2013.

All other proposals of the Committee by and large are clarificatory and correctional in nature and are quite wholesome.

Other proposals

When it comes to the National Financial Reporting Authority (NFRA), the following views of the Committee are quite appropriate:

“The Committee deliberated in detail on the matter and felt that in view of the critical nature of responsibilities wherein lapses have been seen to cause serious repercussions, the need for an independent body to oversee the profession is a requirement of the day. Major economies of the world have already established such regulatory bodies. The Committee by a majority view recommended that NFRA should be established early. Consultation may, however, be carried out with ICAI with regard to the jurisdiction of NFRA and the ICAI representation on NFRA.”It is highly desirable that NFRA is established at the earliest.

As suggested by the Committee, the provisions relating to the constitution of the National Company Law Tribunal and the National Law Appellate Tribunal should be amended to conform to the Supreme Court of India’s order of May, 2015. Otherwise, such a tribunal may become a still born baby.

Conclusion

Law is as good as it is administered. The Companies Act, 2013 is a modern law for a rising India. It is important that the administrators of such a law have a mindset keeping with the spirit of such a law. Unless transformative changes are brought about in its administration, the felt purpose of such a law would be lost. Therefore, the powers that be should address this issue effectively so that India becomes a beckoning economy for the world.

(The author is from

L V V Iyer & Associates, Corporate Lawyers)



On perusal, one gathers an impression the panel has endorsed the core of the Act



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