The Hindu Business Line : Corporate complexities

THE BELIEF OF the Confederation of Indian Industry in the power of market forces is reflected in its criticism of some provisions of the Companies Bill 2003 seeking to ban complex corporate organisations and investment structures. The CII wants companies to have unfettered licence to organise corporate activities in the way they want, suggesting that market forces will discipline errant companies. However, in practice, market forces have failed many a time in this task, allowing companies to create subsidiaries and subsidiaries of subsidiaries to alienate the claims of the various stakeholders. The market now seems to require legislative props to work effectively. So too prosecutors who have always found complex organisational structures difficult to unravel as they go after an anti-social, criminal or illegal act. Only in such a context the framers of Companies Bill 2003 appear to have seen the need to mandate that a subsidiary cannot be a holding company or that a company can have only one investment subsidiary.

However, a balance needs to be struck. The CII's claims that restrictions on corporate investment structures contemplated in the Companies Bill 2003 will slow growth may well be true. Such a ban can thwart the global ambitions of Indian companies. Forays abroad will legitimately require a layer of subsidiaries both to raise capital and to shield the principal company from excessive risks. Making investments in greenfield projects in India itself will require complex organisational structures. Thus, a ban on such structures is too restrictive. Interestingly, in the US, the Enron debacle did not prompt a ban on pyramiding of organisational structures. However, checks and balances need to be in place so that such complex structures do not affect stakeholder claims. Alienation of assets vested in subsidiaries or dilution of the holding company stake must be subject to greater scrutiny and approval of the shareholders. Investment of capital in subsidiaries and mobilisation of capital by the subsidiaries themselves must be subject to scrutiny by holding company shareholders. The incorporation of more than one investment company must also be subject to shareholder scrutiny and approval.

In the end, however, there is no substitute to surveillance by stakeholders such as investors, employees, regulator and the government. They need to unearth stakeholder unfriendly activities and ensure that the corporates are suitably penalised. Most important, companies must be asked to disclose more. In this, unfortunately, the Companies Bill 2003 fails. The Bill mandates that if companies prepare consolidated accounts, they will not have to present separate accounts of the constituents. This will reduce market surveillance of the subsidiaries' activities. Even an analysis of consolidated accounts in conjunction with separate accounts of the constituents may not provide a complete picture. In fact, SEBI should mandate quarterly disclosure of the financial performance of subsidiaries along with that of the holding company. Such enhanced disclosures along with increased checks and balances are a better alternative to a ban.

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