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BW Businessworld

Getting Cos' Act To Deliver

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The Companies Act, 2013 has already seen major overhauling in the name of improving ease of doing business in India. Since its enactment, the government has brought in more than 40 notifications and circulars to meet the demands of India Inc that was not happy with the tighter corporate governance laws and the rules that were introduced to bring in accountability from the promoters’ community. However, it seems that there is no end to the demands of the industry, and the NDA government is hell bent on making the whole purpose of bringing in a new act, meaningless. After forcing the government to change various clauses that required financial responsibility on the part of the promoters before starting a company, the industry is pressing the government hard to be lenient on the laws concerning related party transaction, responsibility of auditors and the definition of relatives.
 
At the very beginning, the Companies Act 2013 did away with a lot of archaic laws and kept only the relevant sections that were recommended by various committees constituted since 1990s. The new act had only 470 sections as against 658 section in the previous one.
 
One must understand that the Companies Act 2013 came into force in the backdrop of massive corporate governance scam that involved one of the largest Indian IT companies, Satyam Computers. The companies bill 2008, which was re-introduced in 2011 by the UPA government wanted to deal with the tendency of Indian promoters to bypass the corporate governance protocols leading to harm to the minority shareholders.
 
The Indian firms lack transparency in their decision making and monetary transactions. Time and again, the institution of independent directors and auditor of the firms have been used to either cheat the shareholders by ignoring the obvious irregularities in maintaining the books of the firm.
 
In such a scenario, the auditing firm has to be accountable for all the financial irregularities that may come to notice. The argument that putting stricter conditions against auditors will prove hinder  effective delivery of services by the audit firms is unconvincing.
 
Many a times Chartered Accountants are hand in glove with financial mismanagement of the companies’ accounts. So, an extra responsibility is a must for professionals dealing with extra information.
 
The industry is also peeved at the clause that restricts companies from doling out benefits to their relatives under the related parted transactions.
 
The industry wants the definition of relatives to be restricted to only ‘dependent relatives’. However, the scam in the coal sector unearthed by the Central Bureau of Investigations throws enough examples how distant relatives and even the company directors can be part of the unethical and questionable transactions that are conducted without the knowledge of the minority shareholders, which may lead to legal troubles for the company later. Another example of doubtful RPTs is the United Spirits that used the profit from its books to finance the ailing Kingfisher Airlines owned by the same promoter (Vijay Mallya)  between 2010 and 2013.
 
It is disturbing to note that the industry first demanded that approval for RPTs should be allowed through ordinary resolution (more than half the voting) instead of special resolution (more than 75 per cent voting). Now, the demand is to dilute the definition of relatives that interprets RPTs.
 
The NDA government must understand the need to improve the ease of doing business, it is important to curb the inspector raj of the government officials. The new companies act was brought to promote corporate governance and safeguard the rights of minority shareholders in Indian companies.
 
Today, the definition of minority shareholders (in practise) just takes care of the small institutional investors. We need to take the benefits of publicly listed companies to the last investor who does not even attend the annual general meeting of the company in which he holds stake, even if it is through a few hundred shares.