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JJ
Irani committee recommends measures for investor protection
The bulkiest enactment in the country, namely the
Companies Act, 1956, is once again in the state of
churning. With the opening up of the economy and increasing
globalisation, there has been a consistent demand
from the corporate sector for the simplification of
the applicable laws and procedures. Companies Act
is one of the main statutes directly dealing with
the corporate sector. The present Minister in charge
of Company Affairs, Mr.Prem Chand Gupta is pursuing
the task with missionary zeal and a sense of purpose.
The
Minister is very keen to have the Companies Act replaced
by a lean and simple version. With a view to ensure
that a proper law is drafted which specifically meets
the needs of the Corporate sector, an Expert Committee
under the Chairmanship of Dr.J.J.Irani, former Managing
Director of TISCO and presently, a director on the Board
of Tata Sons Ltd., was constituted on 2nd December 2004.
Recently, the Committee submitted its report. Based
on this report, the Central Government intends to redraft
the company law by producing a brand new enactment.
While the report contains recommendations on various
aspects relating to the functioning of the companies,
the scope of this article is limited to some of the
recommendations that are directly affecting the interest
of investors.
The Committee has recommended that effective measures
be initiated for protecting the interests of stakeholders
and investors, including small investors, through legal
basis for sound corporate governance practices. An underlying
theme of the recommendations is that an increasing stress
is sought to be laid on shareholders' democracy. While
in theory, shareholders' democracy is indeed a great
concept and needs to be encouraged.
Unfortunately,
in actual practice, shareholders' democracy means total
control by the majority to the virtual exclusion of
the minority. Hence, there is a need to provide adequate
checks and balances to ensure that unscrupulous promoters
do not misuse the system.
The
Committee has suggested that a proper framework for
responsible self-regulation with clear accountability
for such decisions should be in place, thereby obviating
the need for a regime based on Government approvals.
If such a system were effectively implemented, it
would be a great boon for the shareholders as also
the companies. However, I have serious doubts on this
score.
The
Committee has recommended there is no reason for providing
a relaxed framework in respect of corporate governance
of financial institutions. According to the Committee,
such institutions should be put through similar requirements
of financial and management prudence as other FIs.
Therefore, the Committee does not see any reason why
the special regime for Public Financial Institutions
provided under the Companies Act, 1956, should continue.
Vanishing
companies are a major bug bear for the Ministry of
Company Affairs. With a view to check this menace
of vanishing companies, the Committee has suggested
that preventive action should begin at the registration
stage itself and should be sustained through a regime
that requires regular and mandatory filing of statutory
documents. With introduction of electronic filing,
this process would become convenient to companies
as well as the stakeholders.
The Committee has strongly recommended that companies
indulging in non-filing of documents or incorrect
disclosures should be dealt with strictly. In addition,
there should be a system of random scrutiny of filings
of corporates, which should be carried out by the
registration authorities. The Committee has recommended
levy of heavy penalties for the companies found inadequate
in their disclosures and filings.
Another significant suggestion is that an inter agency
coordination system should be put in place so as to
track down the persons behind such companies and bring
them to book. More importantly, the law should be
amended to make them disgorge their ill-gotten gains
by lifting the corporate veil. In other words, those
guilty of corporate scams and frauds should not be
allowed to hide behind the cover of the companies
and the law should penetrate the shield and punish
the culprits.
Similarly,
there have been instances where some promoters have
cheated unsuspecting investors by changing the name
of their company. So the Committee wants that the
authorities should carefully review the whole system
for change of name. The Committee has desired that,
while providing the freedom to a company to change
its name care should be taken to avoid frequent change
of name and prevent cheating investors.
With
a view to protect the interest of various stakeholders
in a company, the Committee has recommended the constitution
of a "Stakeholders' Relationship Committee".
This provision should be applicable to Companies having
a combined shareholder/deposit holder/ debenture holder
base of a thousand or more. The job of the Committee
will include monitoring of redressal of stakeholders'
grievances.
Interestingly,
though the directors are the persons responsible under
the law to run the company, the Companies Act itself
is not very eloquent about their duties. The Committee
wants that the law should include certain duties for
directors, with civil consequences to follow for non-performance.
At the same time, the law should provide only an inclusive
and not exhaustive list of such duties of directors.
According
to the Act, every company is required to hold its
AGM in the place where its registered office is located.
However, the Committee wants that an AGM may also
be held at a place other than the place of its Registered
Office, provided at least 10% members in number reside
at such place. This in any case has to be in India.
If implemented, then all those companies who have
their registered office in a village would feel the
pressure from the shareholders to hold the AGM at
a place convenient to a large number of shareholders.
It
is an open secret that the demand for a poll made
by small shareholders is usually done to harass the
management. So the Committee has suggested that the
demand for poll can be made by shareholder(s) holding
1/10th of the total voting power or shares of paid
up value of Rs.5 lakhs, whichever is less.
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