Approach of new Company Law
Nature and Coverage of the Companies Act
1. During the course of its deliberations the Committee considered the desirable scope and coverage of the Companies Act. Many views were expressed, including the view that administration of the legal framework in respect of certain specified companies, such as listed companies, should be de-linked from the Companies Act and entrusted to specialized regulating agencies, e.g., the capital market regulator. Views were also expressed that it was not feasible for an enactment containing general governance principles to address the specialized requirements of operation of entities in the new environment. After considering these views at length, we are of the view that such opinions do not take into account the nature and scope of corporate governance, which goes far beyond actions limited to any specialized activity, say, for instance, access to capital. Comparisons of the Indian situation with the practice in some other jurisdictions, taken out of context, would also not be well-merited. For instance, in some jurisdictions, the federating entities enact their own independent Company Law. The wide mandate provided to the capital market regulator in such a situation, enables access to capital by corporate entities across the length and breadth of the country on the basis of common norms. Similarly, recent enactments in many countries cannot be seen in isolation to the judicial system and its associated processes in such countries. The impact of such legislation in terms of compliance costs imposed on corporates is yet another issue that would need to be addressed keeping in view the relevant environment.
2. Indian corporates do not face a similar situation as prevailing in some other countries since the Indian Companies Act is a central legislation. It should appropriately remain so. The "sovereign vacuum" created by withdrawal of the Central Government from any area of corporate operation and entrustment of the same entirely to a regulator may generate demands in the Indian Federal system for State legislations on the subject, which we feel could lead to duplication and confusion. Further, regulatory urge to control corporate governance often becomes intrusive, posing serious regulatory risks in addition to inhibiting the freedom for decision making necessary for corporate functioning.
3. The extent to which models in operation in various other countries are relevant to the Indian situation needs to be carefully examined before any aspect is incorporated in the Indian framework. While emphasizing the need for incorporating international best practices, we feel that there is a need to develop an Indian model, suitable to the Indian situation, that provides an adequate solution to the pressing concerns of corporate operation, without affecting the efficiency or competitiveness of business in India.
4. Corporate entities should be able to refer to a compact, easily understood, comprehensive compilation of legal requirements before they start operation. It would not be appropriate to develop different frame works for corporate entities on the basis of their size, nature of operations, manner of raising capital etc. Business entities keep on changing their form and structure from time to time as they grow and also need to adapt to the changing business environment in response to competition, technological change and requirements of operation in the international arena. Presence of differently administered frameworks would be an obstruction to change. This would also result in inter-agency overlaps and conflicts of jurisdiction. Besides, each framework would have its own compliance structure, leading to duplication of effort on the one hand and uncertainties and regulating risk for the corporates on the other. Eventually it would make adaptation to change slow and compliance costly.
5. We are therefore of the view that in the Indian context, it is important that the basic principles guiding the operation of corporate entities from registration to winding up or liquidation should be available in a single, comprehensive, centrally administered frame work. This is important for the law and practice in corporate law to evolve and to bring about necessary reforms in the application of the framework. We hold the view that this would not deny the space to sectoral regulators to regulate behaviour of entities in their respective designated domains. Rather this would enable the regulators to concentrate their resources in a more focused manner on the substantive issues affecting their respective sectors.
6. Further, we are of the view that the legal framework for corporate governance and operation should provide a smooth and seamless transition from one form of business entity to another. Therefore, we recommend a single corporate law framework for application to all companies. The requirements of special companies e.g. small companies, could be recognized through a scheme of exemptions.
Law and adaptation to changing circumstances
7. The existing Companies Act, 1956 is a voluminous document with 781 sections. It also contains provisions that cover aspects which are essentially procedural in nature. In certain areas, it prescribes quantitative limits which are now irrelevant on account of changes that have taken place over a period of time. This format has also resulted in the law becoming very rigid since any change requires an amendment of the law through the parliamentary process. Therefore, the law has failed to take into account the changes in the national and international economic scenario speedily. As a result, in some quarters, it is being regarded as outdated. However, this need not be the case since many essential features of corporate governance which are already recognized in the Companies Act, 1956 need to be retained and articulated further. What is required is that along with the changes in the substantive law, wherever required, a review of procedural aspects may also be undertaken so as to enable greater degree of self-regulation and easy compliance. Therefore, we recommend that the Company Law may be so drafted that while essential principles are retained in the substantive law, procedural and quantitative aspects are shifted to the rules. This would enable the law to remain dynamic and to adapt to the changes in business environment.
Growth of the corporate regulatory framework
8. We feel that the corporate operation, which is complex, cannot in fact be completely regulated by a single set of legal principles. It is clear that in the times to come, a large body of regulatory pronouncements, governance codes and standards will complement the principles which are laid down in the law. Regulatory and professional bodies have an extremely important role to play in this regard. However, such pronouncements have to be consistent with the underlying law. A case in point is the harmonious evolution of the accounting standards in India to keep pace with the international developments and the manner in which it has been facilitated by the Companies Act, 1956. Such mechanism will have to dovetail with the Companies Act so as to expand its coverage in a meaningful manner while allowing a modality for improvements over time.
9. Perception in some quarters as to the need to demarcate the respective jurisdictions of Ministry of Company Affairs (MCA) and SEBI has come to our notice. In our view, this perception is misplaced. In so far as, the legal framework is concerned, the Central Government is represented through a Ministry which would be required to exercise the sovereign function and discharge the responsibility of the State in corporate regulation. SEBI, on the other hand, is a capital markets regulator having distinct responsibilities in regulation of the conduct of intermediaries capital market and interaction between entities seeking to raise and invest in capital.
10. We do not subscribe to the view that corporates seeking access to capital need to be liberated from their responsibilities under all other laws of the land and , thereby the oversight by the State, and be subjected to exclusive control and supervision of a specific regulator. Corporates have to function as economic persons within the Union of India in a manner that contributes to the social and economic well being of the country as a whole and as such must be subject to the laws pronounced by the Parliament for the welfare of its citizens.
11. Corporate Governance goes far beyond access to capital. Taking a narrow view of Corporate Governance as limited to public issue of capital and the processes that follow would be to the detriment of corporate entities themselves. Equally, the capital market regulator has to play a central role in public access to capital by the companies and must have he necessary space to develop suitable frameworks in tune with the fluidity of the capital markets.
12. To our mind, with the substantive law being compiled to reflect the core governing principles of corporate operations and separation of procedural aspects, it would be possible for the Regulator to provide the framework of rules for its domain consistent with the law. Such rules would be complementary to the legislated framework and there would be no overlap or conflict of jurisdiction between regulatory bodies. We therefore recommend a harmonious construction for operation of the State and regulatory agencies set up by it.
Framework for small enterprises
13. The Committee recognized that the Indian economy is yet in its growing phase. The number of companies being set up will increase over a period of time as new business opportunities emerge and new technological frontiers are scaled. Many new companies will be set up as small companies who will grow big in the future. It is clear that the small companies would contribute significantly to Indian economy. Because of their size, they cannot be burdened with the same level of compliance requirements as, say, the large public listed companies. The small companies have to be enabled to take quick decisions, be adaptable and nimble in the changing economic environment, yet be encouraged to comply with the essential requirements of the law through low cost of compliance. The Government may prescribe special regime for such companies through a system of exemptions.
14. Corporate issues will also require a quick resolution. The time taken in the existing framework needs to be reviewed. This is particularly so in the context of rehabilitation, liquidation and winding up. Mergers and amalgamations also need to be facilitated to take place through a speedier process. Through the Companies (Second Amendment) Act, 2002 the Government has envisaged setting up of the National Company Law Tribunal and the National Company Law Appellate Tribunal. We welcome this move. It is time the forum with specialization to deal with corporate issues, bringing together expertise from various disciplines, is established. We are informed that there are certain legal issues to be resolved before these institutions can be set up. We hope that this process is speedily concluded so that a single forum is available for an informed consideration of corporates issues