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State power over corporates all set to increase

October 11, 2010 16:54 IST

The Parliamentary Standing Committee on Finance has recently submitted its report on the Companies Bill, 209 (Companies Bill).

The suggestions and recommendations of the committee may or may not find its way into the legislation that would eventually get passed.

However, the direction in which the Companies Bill is headed is one of increasing intervention of the State into corporate affairs.

Interestingly, the Standing Committee has noticed that there is an "excessive role and scope for delegated legislation" i.e. a large role for government to legislate and has said that the Ministry of Corporate Affairs (MCA) should reconsider this issue.

In other words, the Companies Bill seeks to empower the government to make rules and regulations on various issues – thereby giving government a greater role and say in corporate affairs, instead of setting out the law as far as possible in the Companies Bill itself so that government's role is not large. 

In this regard, the Committee noticed that the words "as may be prescribed" occur 235 times in the Companies Bill.

The Committee believes that the Companies Bill "needs to have a futuristic vision" and that all contemporary and emerging issues including anticipated problems concerning the corporate sector should be appropriately addressed in the Companies Bill.

However, it has barely managed to get the MCA to remove just about 25 issues from the list of items where the government can get prescriptive on its own.

The Committee seems to suggest that an inspector of the MCA ought to have the power to conduct a search and seizure of books and records of any company (popular term: "raid") without the check and balance of having to obtain an order from a magistrate – the standard safeguard of magisterial oversight is contained even in special legislation such as the Securities and Exchange Board of India Act, 1992 (SEBI Act).

The inspector is also allowed to retain books of accounts and records of the company for a period of 180 days, extendable by another 180 days – clearly a specific interventionist power being vested in yet another government agency.

The Committee also seems to have lost the plot with corporate governance - confusing the role of the MCA with the role of other specialized regulators. The Committee has expressed its "desire that other significant and substantive matters included in….the Listing Agreement prescribed by SEBI may also be mandated for listed companies and considered for including…in the Bill."

In other words, the Committee wants the Companies Bill to replicate and contain provisions relating to corporate governance, rather than leave regulation of listed companies to SEBI, the specialised regulator designated for this purpose.

In doing so, instead of taking a hard look at the corporate gov-ernance mechanism administered by SEBI, the Committee has simply sought to adopt whatever SEBI is doing in this area, and worse, to write even greater legislation atop this structure.

"Many brush aside… Satyam…as…one-off. However, this…needs to be seen as a watershed event for … Independent Directors," the Committee's report states.

Yet, the Committee has lost the opportunity to ask an existential question – whether the current regime of using the office of the "independent director" is at all effective or whether it is fundamentally flawed.

Worse, the MCA is now being given a greater say under company law on defining the role of independent directors – a provision in the Companies Bill will state that the "role, duties and functions of independent directors shall be such as may be prescribed by the Central Government". 

Therefore, this is one of the 235 areas in which the MCA has been given powers to be prescriptive on what independent directors are expected to do.  The Committee wants the MCA to do more in this area.

The report states: "The government should, therefore, prescribe precisely their mode of appointment, their qualifications, extent of independence from promoters / management, their role and responsibilities as well as their liabilities…. A provision may also be made for their rotation by restricting their tenure in a company to say, five years."

Curiously, SEBI and the Reserve Bank of India were heard by the Committee about the need to avoid regulatory overlap. The report says: "It was their (SEBI's) plea that the provisions in respect of specified matters, irrespective of the chapters they are located, may be dealt with by SEBI or Government as the case may be, which would remove regulatory gaps, overlaps and inconsistencies in regulation."

The RBI too pointed out the need for a specific provision stating that in the event of a conflict between company law and banking regulation, the latter should prevail – a provision contained in the Companies Act, 1956, which is being deleted.

Yet, the Committee seems to have been taken in by the MCA's response that the Irani Committee had stated that the perception that regulatory jurisdictions ought to be demarcated is misplaced.

The Committee had reproduced the MCA's arguments in favour of defining specific securities legislation concepts such as "insider trading" and "takeovers" in the Companies Bill. Although the Committee seems to conclude that there should be "no jurisidictional overlap or conflict, there is no specific recommendation whatsoever from the Committee on deletion or insertion of specific provisions to ensure that regulatory overlap is obviated.

The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.

Somasekhar Sundaresan
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