|The right company|
|Saturday, 10 August 2013 12:56|
Indian Express edit
Companies Act can help change the way corporates are governed, and empower shareholders
Each time a big scam occurs, it turns out the company's board didn't know what was happening, or the minority shareholders had no way of registering their dissent, or the auditors and/or independent directors were hand in glove with the management. It is to fix this that, close to a decade ago, the government had begun the process of cleaning up the Companies Act of 1956, which is largely based on a law dating back to 1913. While the J.J. Irani Committee tasked with this finished its job in May 2005, the law never got enacted, for one reason or another. Now, the Companies Act promises to change the paradigm in which India Inc will operate.
It may take a year or more to come into actual effect, since the rules that operationalise the act are being framed, but the broad thrust is positive. More so if you combine this with changes made in other laws. Under a Sebi ruling framed a few months ago, for instance, minority shareholders who look like they could lose out in a deal have the power to veto it. The new law, which deals with what are known as related-party transactions, calls for them to be put to vote in a company AGM, a voting in which only the preferences of non-interested parties are counted.
While the compulsory CSR-spend of 2 per cent of profits has rightly received adverse publicity, the Companies Act has many progressive ideas. Given the number of subsidiaries, and subsidiaries of these subsidiaries, that many Indian corporates have, unravelling their mysteries is an investor's nightmare. For many, such accounting vehicles serve as a convenient place to hide large amounts of debt or loss. The Companies Act puts a limit to the number of layers of "subsidiarisation" that can be allowed. More importantly, the accounts of such subsidiaries will have to be disclosed more fully. Auditors have to be compulsorily rotated to prevent possible collusion, a new financial reporting authority will keep a watch on auditors, mergers have been made simpler, independent directors will have a fixed term, and special fast-track courts are to be set up to adjudicate on any contravention of the Companies Act. As always, the devil is in the detail, and if the rules are too restrictive, or too liberal, as in the case of disclosure of accounts of subsidiaries, the purpose gets defeated. If, after all this, the governance structure is still not enough, there is the possibility of class action suits that the Companies Act now allows. After 57 years, finally, an act in keeping with the spirit of the times.