Companies Bill, 2009 — A desultory exercise

Companies Bill, 2009 — A desultory exercise

Sub-Clause (5) of Clause 132 does not clearly debar a relative of a promoter from becoming an independent director

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The feature of excessive delegated legislation under the Companies Bill, 2009, will create a lot of difficulties.

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Minister of State for Corporate Affairs and Minority Affairs Salman Khurshid, who recently introduced the Companies Bill, 2009, in the Lok Sabha.

The Companies Bill, 2009, contains 426 sections, as against 658 sections in the existing Law. The reduction of 232 sections in the Companies Bill, 2009, has been made possible by the power to make more than 200 rules. Contrast this with the enlarged Companies Act, 2006, of the U.K. with 1,300 sections and 16 schedules. The obsession with cutting down on size at the cost of substance is unfortunate.

Proposed changes

Clause 2 (zq) introduces a uniform financial year for all companies with powers to the Company Law Tribunal, to allow a different financial year. In a globalised era, to impose a uniform financial year irrespective of the nature of business of a company, is not desirable.

In sub-clause (zzzi) (ii) of Clause 2, a subsidiary company also means a company in which the holding company exercises or controls more than one half of the total voting power.

Although such a concept is known in the accounting parlance, from a structural and legal point of view such a clause can lead to uncertainties and litigations.

Voting rights

Under sub-Clause (zzzk) ‘total voting power’ means the total number of votes cast at a meeting of the company if all the members thereof cast their votes either personally or by means of postal ballot.

When a member votes personally he votes only on a show of hands and has only one vote irrespective of the number of shares held by him and that is the reason Section 2 (48) of the Companies Act, 1956, mentions voting on a poll which gives as many votes as the number of shares a member holds. This discrepancy must be removed.

Clause 2 (zzi) says that every director, who is aware of a contravention of Company Law by virtue of the receipt by him of any proceedings of the board, shall be an officer who is in default. This would deter good people from joining company boards.

Sub-clause (zzz) says that “relative” with reference to any individual means the spouse, brother, sister and all lineal ascendants and descendants of such individual related to him either by marriage or adoption. Strangely relationship by birth has been left out.

There is no provision corresponding to Sec. 64 of the Companies Act, 1956, for offer of sale of shares in a company.

In Clauses 52 and 53 the important provision in Sec. 111A (3) that rectification of register of members is only possible when there is a violation of statute law has been omitted.

Under Clause 66, companies can get deposits only from their shareholders. This provision can easily be abused by giving one share each to members of the public and then getting deposits from them.

There is no corresponding provision like Sec. 9 of the Companies Act, 1956, to say that provisions of the Companies Act would have an overriding effect.

Equity shares with differential voting rights have been abolished.

In the place of the existing Sec. 212, consolidation of subsidiary companies’ accounts has been mandated by Clause 117 also for unlisted companies.

Clause 229 says that on demand by the secured creditors of a company representing 50 per cent or more of its outstanding amount of debt, if the company fails to pay the debt within 30 days, such a company can be declared as a sick company.

This is a dangerous provision if it is not provided that such a demand can be made only on due dates.

There is no corresponding provision like Sec. 383A of the Companies Act, 1956, for the compulsory appointment of qualified company secretaries.

Share buyback

Under sub-Clause (9) of Clause 201, buyback of shares cannot be made through an arrangement sanctioned by the Court. In India where buyback of shares is yet to be understood as a value adding corporate action rather than as an exercise to shore up promoter shareholding, buy back of shares sanctioned by the Court with proper safeguards should not be prohibited.

Sec. 349, which provides the basis for calculating the net profit for the purpose of managerial remuneration, has been omitted. In the absence of such a provision, what went wrong in corporate America regarding top management salaries can also happen in India. Regulation of top corporate salaries through Rules under the Bill is not desirable.

Drafting absurdities

Clause 2 (zz) defines ‘Issued Capital’ as the capital subscribed by the public. Clause 37 defines equity share capital and preference share capital as being part of issued share capital, which means equity share capital and preference share capital can be subscribed only by the public.

In clause 2 (zzl) paid up share capital can be only shares issued against cash. What happens to bonus shares, shares issued against consideration other than cash, shares issued pursuant to mergers and demergers?

Clause 103 talks of voting by postal ballot when it comes to an ordinary resolution but when it comes to a special resolution voting by postal ballot has been strangely omitted.

Clause 2 (zzzg) brings in the concept of a small company with a paid up share capital of not more than Rs. 5 crore or with an annual turnover of not more than Rs. 20 crore, to be exempted from certain provisions of the Companies Act as may be prescribed.

Under Clause 3 (c) a One Person Company can be incorporated as a commercial company and under clause 4, it can also be licensed as a non-commercial Sec. 25 company.

Clause 30 makes all associated personally liable without any limitation of liability, for losses of the subscribers of securities issued with intent to defraud applicants. This will deter unscrupulous issuers.

Clause 118 read with Clause 126 has introduced auditing standards, which is welcome.

Under Sub-clause (5) of Clause 132 an independent director can have transactions with the company up to 10 per cent of the turnover of the company. Many a company has an annual turnover far in excess of Rs. 1,000 crore and if a director transacts with such a company for Rs. 99 crore, he would still be an independent director in law. Such a provision, throws all canons of corporate governance to the winds.

Sub-Clause (5) of Clause 132 does not clearly debar a relative of a Promoter from becoming an independent director. This is a glaring omission.

Clause 147 lays down the common law duties of a director. The spirit of Sec. 172 of the U. K. should be adopted, where a director of a company has to promote the success of a company by acting in good faith and in a manner, which is in the interest of the employees, foster a company’s business relationship with suppliers, customers and the community at large.

Welcome provisions

Clause 204 provides a simple procedure for the amalgamation of two small companies or between the holding company and its wholly owned subsidiary company without the intervention of the Tribunal if such companies get the requisite approval of the members and the creditors. Clause 205 permits cross border amalgamations between companies registered in India and in other countries and vice-versa. These are welcome provisions.

Under Clause 216 class action by shareholders or creditors is allowed. This should usher in the much needed shareholder activitism in India.

Clause 396 of the Bill provides for establishment of special courts for speedy trial of offences under the Company Law. This is welcome.

Absence of big ideas

The Companies Bill, 2009, does not have many big ideas. Like the English Law, the Indian Company Law should also introduce the concept of realised profits for remuneration to directors and dividend. Similarly, corporate governance regulations could be given statutory teeth by giving more powers to SEBI for notifying such regulations for listed companies.

Clause 6 (3) provides for entrenchment provisions in the Articles of Association of a company, which can be changed only in accordance with a certain procedure. This is a welcome provision. With more foreign direct investments, the typical provisions in a shareholders’ agreement like right of first offer or refusal, affirmative voting rights, dead-lock provisions, lock-in provisions for transferability of shares, tag along rights and drag along rights should be given statutory protection under the Company Law. Further, Indian Company Law should be by and large harmonised with the Company Law of developed countries like that of the U.K.

While independent directors must be given statutory protection under the Company Law against arrests under any State law or other Central law except under extraordinary grounds clearly stated in the Company Law by the Central regulators, the Company Law must provide for compulsory retirement of both independent directors and auditors beyond a certain tenure of office.

Like under the U.K. Company Law, the assets of a company under liquidation should be made 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 could be conducted by a top team of professionals like corporate lawyers, forensic accountants and others. The jurisdiction for liquidation of companies could be vested either in an expanded Company Law Board or in NCLTs (national company law tribunals) since liquidation of companies is only quasi judicial in nature.

The Company Law should provide statutory powers to a Serious Fraud Office with investigating teams consisting of corporate lawyers, forensic accountants and senior officers seconded from the police departments. To curb the recurrence of corporate frauds, the statutory auditors report should state that sufficient systems exist in the company for early detention of frauds.

It is the ineffective administration of the Company Law, which poses the biggest hurdle. The recent attempt to introduce electronic processes for the administration of the Company Law has helped matters. However, much more needs to be achieved. An independent and competent Company Law Regulator should be put in place for the administration of Company Law in this country.

The feature of excessive delegated legislation under the Companies Bill, 2009, would create a lot of difficulties. The Companies Bill, 2009, should be referred to a select committee of experts to iron out the many inconsistencies in the Bill. The committee should transparently discuss and debate some big ideas along with the deficiencies of the Bill before incorporating suitable changes in the Bill. Anything short of this would not serve the purpose.

L. V. V. IYER

CORPORATE LAWYER

He can be contacted at: iyerassociates@sify.com