The Hindu Business Line : Why change horses midstream

A CONCEPT Paper outlining the roadmap for codification of company law was released by the Ministry of Company Affairs on August 4, 2004. The purpose of the Concept Paper is to provoke critical examination of the provisions contained therein and to incorporate the suggestions from the corporate sector and other interested parties in the draft Companies Bill and table the same in Parliament. The new Companies Bill will replace the existing Companies Act, 1956 which has stood the test of time.

This is not the first attempt at re-codifying the company law. Two previous attempts towards this objective were not successful. Both the Companies Bill, 1993 and the Companies Bill, 1997 were drafted after extensive discussions/public debate, introduced in Parliament and kept pending for a long time. Various factors, including the then prevailing political instability, could have led to the ultimate withdrawal of these Bills. Now, the codification of company law has again come to the centre stage. It may be noted that the recommendations of various committees formed for effecting reforms in company law have been considered and incorporated in the Act in the form of amendments from time to time. Companies need to take approval of the Ministry only in a few cases and shareholders have got more powers than before. Disclosures and compliance certificates have replaced the approval route. It is in this background that the Companies (Amendment) Bill, 2003 containing important provisions in the area of independence of auditors, relationship of auditors with management, appointment of auditors aimed at improving the corporate governance practices has been introduced in the Rajya Sabha.

Further, provisions relating to buyback of securities, producer companies, issue of sweat equity shares and transfer of powers to SEBI in respect of issue of capital arising out of the liberalisation of economy, have already found place in the existing Companies Act. The dynamic capital market scenario is monitored by SEBI, which is the apex regulatory body. The changes in economic conditions are mainly reflected in the capital market and SEBI is taking appropriate steps to make regulatory changes.

Listed companies are now controlled by SEBI and are more or less now outside the purview of the Companies Act except with regard to certain core matters. A lot of measures have already been taken in the area of corporate governance through amendments to the Listing Agreement with the stock exchanges.

In short, one may safely assume that the process of reforming company law provisions in tune with the changing needs of the economy is more or less fulfilled by the existing Act itself, of course through a spate of requisite amendments made from time to time. The re-codification of law at this stage will be limited to renumbering of the Act consequent to deletion of redundant provisions. Many other important pieces of legislation such as the Factories Act, 1948, the Indian Contracts Act, 1872, the Negotiable Instruments Act, 1881, and so on, legislated long before the Companies Act, are still continuing. Viewed in this background, it seems that the Government can simply pass and legislate the Companies (Amendment) Bill, 2003 incorporating the suggestions from all interested parties rather than venture into a new Companies Act.

Another argument in favour of codification is to reduce the size of the Act from 781 Sections to 289 Sections and from 15 Schedules to a few Schedules. Prima facie, the logic seems to be sound, but reduction does not necessarily lead to simplification and effective rationalisation. The number has come down mainly due to delinking of procedural aspects from substantive law. This means many provisions forming part of the present Act will be notified by the Department of Company Affairs in the form of Rules.

The new Act will have less number of Sections and Schedules but will be flooded with a number of Rules, akin to the SEBI Act, which contains less Sections but more Rules and Regulations. If one considers the total bulk of the legislation, including the Act and the relevant Rules and Regulations thereunder, the total reduction will be minimal. This cannot be construed to be proper rationalisation and simplification. The Act may remain comparatively sleek but one may have to refer to the various Rules to understand the legal provision correctly at any point of time.

The delinking of procedural aspects from the substantive law has another disadvantage. Company law is primarily a procedural law and it is ideal to have procedures as part of the Companies Act itself. This will result in transfer of power from Parliament to the Ministry, implying that the Rules may be notified more frequently than the Act. Amendments to the Act are now more transparent whereas amendment to the Rules will be notified quickly and, perhaps, without adequate discussions.

It is quite likely that the Rules will keep changing through various amendment to the Rules themselves. A number of Rules are already in existence and the new proposal will increase the number further substantially. Thus, the objective of a reduction in the size of the Act will not be achieved.

It may be argued that notification and amendment to the Rules can be done quickly since Parliament approval is not required. However, if time is the sole factor, an amendment to the Act can be made through Presidential Ordinance which has already been resorted to on certain earlier occasions. Moreover, it will be easier to keep track of the amendments to the Act cleared by Parliament than amendment to the Rules notified by the Ministry from time to time.

A look now at certain provisions based on the Concept Paper:

Take the case of the important provision relating to the appointment of a managing director or a whole-time director or a manager of a public company. Currently, Schedule XIII of the Companies Act, 1956 deals with the conditions to be fulfilled regarding the appointment without the approval of the Central Government. In the proposed new Act, these will be prescribed separately. To know the exact position of law in this regard, one has to look into both the provisions. [Clause 82 (6)]

It appears that the provisions relating to commencement of business has now been proposed to be made applicable to private companies [Clause 10] while Section 149 (7) of the Companies Act exempts private companies from the applicability of provisions relating to commencement of business. The rationale for the same is not clear. Whether this is a case of drafting error is not known.

While the qualification of a company secretary is specified in Clause 87 (1), the qualification of a chief accounts officer has not been specified in Clause 88 (1) but is being prescribed separately.

The specimen of key documents of a company, such as memorandum of association and articles of association now contained in Schedule I to the Companies Act, is sought to be deleted from the main Act but are sought to be prescribed separately. [Clause 5 (5)]

The major point of debate is that while provisions under an Act are subject to discussions, deliberations, public scrutiny and parliamentary sanction, provisions notified under the Rules are not. To get a clearer picture, the new Act along with all draft Rules, Regulations and Forms have to be notified for inviting wider public debate. Before attempting to bring in the new Act, this aspect requires immediate attention by simultaneously publishing the proposed Rules and Regulations under the new Companies Act. In the absence of the same, the exact position is not made clearly known.

To conclude, the Companies Act has met the myriad requirements of the corporate sector, corporate professionals and other interested persons, including investors and the general public. It is also familiar to every one concerned. Hence, effecting amendments to the Act is a time tested and effective method compared to notifying a new Act in toto. No Act is perfect or can remain static. Even if a new Companies Act is passed, amendments may have to be made in keeping with the changing times, subject to parliamentary debate and scrutiny.

As the new Act proposed does not offer any path-breaking direction with tangible and substantial benefits to the corporate sector, introduction of the same has to be reviewed. Continuing with the current Act merits consideration by the appropriate authorities.

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